Do Distributions Compromise Repayment?

A business can pay an owner two different ways, by either paying the owner a salary or awarding the owner some of the profits via distributions. It is not uncommon for a business to pay an owner both a salary and distributions. We generally accept that an owner’s salary is an operating expense like a manager’s salary that would need to be paid, regardless if the owner is actively involved with the business.

The treatment of distributions, which is when owners are paid cash for simply being an owner, is an underwriting question that a few institutions have inquired about recently. The main concern is whether distributions to owners should be considered a drain on a business’s cash flow. I think it depends, and it gets to be quite philosophical to explain.

From a pure accounting standpoint, yes, payments to owners is cash leaving the business. But, is a business weaker for having paid the owner? Take for example an apartment building, where rental cash flow is stable and recurs monthly. If a real estate investor borrowed money to purchase the apartment building, then he/she will use the rental income to pay the mortgage. If there is money left over after the mortgage payment, should the investor be allowed to take that money as profit, or should the investor be forced to keep it in an account for future apartment related expenses? This is a tricky question. The prevailing strategy is to make the investor save some of the money, typically called a capital expenditure reserve, but then allow the investor to take what profits are left after contributing to the reserve.

In the apartment example, we consider the cash flow available to pay the mortgage as the net income less the capital expenditure reserve. Some people believe the cash flow to pay the mortgage should be considered the net income, less the capital expenditure reserve, and less any cash the owner took. The latter method creates interesting reporting issues. If the investor takes all the profits, then the property looks like it is only achieving break-even cash flow. Or, if the property accounts have extra cash from earlier periods, and the owner takes this cash out, then this can result in the appearance of a cash flow deficit, even when the property is generating sufficient money.

In real estate lending, our collateral is primarily real estate, and the value of that collateral will not be seriously impacted by how much excess rental income an investor pockets as profit. For this reason, we tend not to limit owner distributions for commercial real estate loans. This is notably different than a commercial enterprise that has a line of credit secured by inventory or receivables, or a business borrowing for equipment or intangibles. When real estate is not the collateral, our security is “chattels,” which are items that can potentially be moved or liquidated without the lender’s knowledge. In this case, we care much more when a business owner wants to distribute money to him/herself. Now we rely heavily on the balance sheet strength for likelihood of repayment, and so we want to make sure the business retains cash to deal with fluctuations in revenue or expenses, and retains liquidity to make their debt payments!

What this boils down to are some general differences in structuring loan covenants. For commercial real estate, the collateral and ability for repayment have little to do with how much cash is being moved out of the business entity. The real estate holds value regardless of movement of cash, so we tend not to subtract distributions from cash flow we measure. Whereas, with a line of credit that is secured by accounts receivable, we want to prevent the borrower from collecting the receivables and distributing the cash, instead of first paying off outstanding debts. That is why in non-real estate transactions we count distributions as a negative impact to cash flow, because the distributions can significantly impair repayment of our debt.

Customer Service Lessons from Microsoft

Our company uses the Enterprise version of Office 365.  We also use Skype for Business for our phones.  I love the product.  There are so many features that are amazing and so many others we have not had the time to even figure out yet.  The system is very simple to use as well. 

Last month, I had an issue that came up with my billing for the service.  I received emails from Microsoft and went online to attempt to fix the problem.  Whatever I did, I must have done wrong since, I continued to receive emails.  Finally, the issue elevated to a level of critical in my mind and this coincided with just enough free time to fix the issue.  So I attempted to go online to address the billing problem, but ended unsure if it was corrected.

At this point, I had to contact Microsoft in some way.  The most arduous part of the process was figuring out how to contact them in the first place.  I spent an hour rooting around the administration side of 365 trying to figure out how to contact them of fix the problem.  When I finally figured out how to turn in a support ticket, the actions from Microsoft were like those of runners after the starting pistol fires.

I received an email in response to my ticket within 10 minutes.  In another 10 I had info on the person who was assigned the task with contact information.  In another 5 minutes I had a call from Washington from Microsoft, which of course I missed because I was on the other line. 

So I called Microsoft and first spoke to a representative who triaged the problem and sent me to the correct department.  I was transferred to the next rep who corrected the problem in a matter of minutes.  Everyone I spoke to at Microsoft was gracious and kind.  I left for home that evening thinking that my problem was over and the email and phones at Pactola were safe and able to continue operation without interruptions. 

But that was not the end of my time with Microsoft.  I received a confirmation email that evening, then another email the next day with a survey telling the problem was fixed and that they would call me in a few days to make sure everything was taken care of to my satisfaction.  Two days later, I took a call from a Microsoft gent who conversed with me about the problem and if all was taken care of to my satisfaction.  He ended the call thanking me for my patronage and explaining that another email would follow in a few days where I could make further comments and rate their service.

This event is not uncommon with my experiences with Microsoft.  I had issues back in December when I was trying to port our phone numbers from another carrier to go to their phone system.  They were wonderful to work with at that time.  I probably will be a Microsoft customer for life. 

So how many of your members can you say that of?  Do you have not only members who come back to do their next account with you, but who are raving fans of your CU?  Heck, if you can get a large army of people like that, it is better advertising than anything that comes out of your marketing department!

The only negative I had was how to get ahold of Microsoft in the first place.  That is something we all need to think about.  What is the experience like for an outsider who is doing business with us?  This position I am in has given me the opportunity to talk to folks in credit unions all around the country.  You would be amazed at how many have phone systems that make you believe there is a better chance of talking to an individual when you are stranded in a Dakota snowstorm out on a back country road than you have with trying to visit with the right person at the credit union.

We dealt with the access issue a few months back with one of our computer systems.  We made it a lot easier for loan investors to get into and access their loan files and reports on loans we manage for them.  This has been quite successful and we have a lot of happy folks with the new PacPortal.

It is important to be able to step outside of your institution and see how it is to do business with you.  Work through the entire experience if there is a problem that must be resolved.  How happy would you be?  Would you be frustrated or would you end up being not only a loyal customer, but a raving fan?

Getting Used to Sub - Zero

The Tokyo based safe manufacturer Elko, has reported that shipments of home safes have doubled since last fall.  The German insurer Munich Re has stashed some 10 million euros into its own cash vaults.  There also seems to be a recent appeal of hard assets like gold and silver.  These are just a few examples how individuals and companies are squirreling cash away.  But why?

One reason is the creeping imposition of negative interest rates.  This could make it more rewarding to bypass banks and using your own safe or vault is more secure than putting the money under your mattress. 

This is the new world of upside down world of modern monetary policy.  Borrowers are rewarded and savers are penalized.  Low rates are used to fund massive government deficits as politicians spend with abandon.  Now almost 500 million people in a quarter of the global economy live in countries that have interest rates below zero.  This new paradigm was unimaginable before the 2008 crash and no major economy considered it until two years ago, when the European Central Bank started the experiment.  They are actually charging institutions to deposit money with the central bankers. 

The overall goal is to create more inflation as more money gets out in the economy.  Inflation is currently running around 1% for developed markets, which is half of the 2% that authorities view as necessary for price stability.  The overall aim would be to goad banks into looking in other places to put their cash, such as lending to companies and consumers, who could benefit from the lower interest rates.  Also, in some countries, there is a hope that investors will put their money outside of their home country, thus causing the home currency to fall, which will make exports more attractive. 

The policy has risks.  Bank profits can get squeezed, money markets can freeze up, and consumers can end up with a bulging mattress full of cash to avoid paying a bank to keep their money there.  This could implode and make inflation even weaker.

Barry Eichengreen, and economist at University of California-Berkley quotes, “I’m skeptical about the efficacy of negative interest rates.  They increase the cost of doing business for the banks, which find it hard to pass on those costs to borrowers, given the weakness of the economy and hence of loan demand.  Weaker financial institution balance sheets are not ideal from the standpoint of jump starting growth.” 

Weaker banks are what we are beginning to see.  In 2015 Deutsche Bank had its first loss since 2008.  Analysts at Goldman Sachs believe that banks heavily reliant on deposits will see an earnings per share drop of at least 10% for each cut of 10 basis points.  Another issue that is brought out by UBS, is that loan demand is lacking no matter how affordable the loan rate is.  Sound businesses tend to not borrow if they are concerned with the direction of the economy.

This leads to the worry that central bankers are really clueless at this point in time.  Everything they are doing is a vain attempt to stimulate economic growth.  The fear in the back smoke covered rooms is that they have no control and that this is the new normal.  Already over $8 trillion of bonds now have rates below 0%.  Japan paid investors to buy 10-year debt this year for the first time.  Some companies like Royal Dutch Shell and Siemens have seen their yields drop into negative territory. 

The trend is to go even more negative.  JP Morgan expects we could see rates as low as -4.5% in Europe and -3.45% in Japan before the end of the year. 

Central bankers will have to reverse this policy if banks pass on the cost of the negative rate to the consumer, who in turn pull out their money out of the banks.  This could return us to the bank runs of the Great Depression.  A survey of 13,000 customers of ING found that more than ¾ of depositors would remove their funds if they had negative rates imposed on their savings.   Of course as we move toward a more cashless society, this increases the ability of the central bank to run a negative rate policy. 

Ultimately, I think this will end up being counterproductive.  Economics can be boiled down into four words, “People Respond to Incentives.”  If you take away the interest one has in savings at their local CU and imposes costs just to have the money there, you take away the incentive to save.  

Analyzing the Presidential Election

Analyzing the Presidential Election

Underwriting loans is largely an effort to predict the future. We cannot predict the future perfectly, but we can create a bounded rationality in which a likely outcome is expected to occur. It is like predicting the weather. We can’t guarantee 100% of the time it won’t snow in September, but we know the likelihood is relatively low, so it is okay to plan travel and outdoor events then.

We can look at the possible outcome of our next election with predictive tools too. Again, we cannot make a perfect prediction, but we can describe what the likely outcomes look like. The first big mistake people are likely to make is looking at national polls to see which presidential candidate is getting the most potential votes. In the United States, candidates are not elected by a national popular vote, but rather by the electoral college. While it seems counterintuitive to ignore national polls, someone can get elected by having a majority in the electoral college, and not having a majority of the popular vote.

The electoral college is comprised of 538 votes, and a candidate needs to win a majority of those votes, which is a minimum of 270 votes. Each senator and representative counts as 1 electoral vote. As you may know by now, South Dakota and North Dakota each get 3 electoral votes. So looking at the electoral college, which candidate or political party is winning?

CNN has done a great job at summarizing the current state of the electoral map. Based on current polling and historical data, the Republican party has 158 safe votes and 33 votes from states likely to vote for them, to total to a predicted 191 votes. This means the Republicans will need to win 79 votes from battleground states, which are states that show the candidates in equal standings or have a history of switching political parties.

On the other hand, the Democratic party has 201 votes in safe states and 35 votes from states likely to vote for them, for a total of 236 predicted votes. This means the Democrats would only need 34 votes from battleground states, which is less than half of the amount the Republicans need from battleground states.

So what is going on in the battleground states? Based on the highly predictive blog Fivethirtyeight.com, Clinton would win 293 electoral votes as of today, and Trump would win 244 electoral votes. Compared to previous elections, George W. Bush won his first election with 271 electoral votes, and with 286 electoral votes in his second election. Obama won with 365 electoral votes in his first election, and 332 electoral votes in his second election.

Fivethirtyeight.com suggests the current split in electoral votes gives Clinton a 60.2% chance that she will be elected, and Trump a 39.7% chance. This means if we need to establish a bounded rationality, there is still significant odds that Trump could win, despite having to capture 79 battleground votes.

If I were asked to underwrite the outcome of the election, I would honestly tell people there is no strong front-runner. This election will be unlike the wide margins in Obama’s elections, but it is hard to say if it will be a nail-bitter like the George W. Bush elections. We can say it is clear that Clinton has the advantage so far, but there are still three more months to go.

http://www.cnn.com/2016/07/20/politics/road-to-270-electoral-college-map-2/index.html

http://projects.fivethirtyeight.com/2016-election-forecast/

Understanding the Brexit

If you read a lot of financial news, you are probably sick of hearing about the vote held in the U.K. to leave the European Union, which has been coined the Brexit. Even I’m sick of hearing about it, but there is a story that we in the Dakotas may be able to take away from all of this.

What first struck me is, why the U.K.? Clearly, they didn’t have as much to gain by leaving the European Union as other countries. You see, Greece and Spain are stuck in this horrible situation with very high unemployment and economic stagnation. They have largely endured these situations because they have remained part of the European Union, and more importantly, maintained the Euro as their currency. Before the EU and the Euro, Greece and Spain could have devalued their currencies, making goods and services cheaper, which in turn attracts more consumption and puts their populations back to work. I was so sure this is what Greece and Spain needed to do, that I assumed it would undoubtedly lead to them leaving the EU. But, they haven’t. Why?

Greece and Spain may still leave, but given what they have suffered through, it might be considered a surprising change of course as of 2016. They chose to remain in the EU because, despite the suffering of their people, they believed very strongly in a European dream. They felt that suffering was short-term, and in the long-term greater integration would payoff both economically and politically.

Now, let’s look at the United Kingdom. Their economic realities were not as bad as that of Greece and Spain. But, their people felt, in the long-run, they would be worse off with free trade and the free movement of labor. Also, the United Kingdom did not adopt the Euro currency but retained their pound sterling. For these reasons, it would seem as though the European dream did not burn as brightly in the United Kingdom, which is why they have voted to leave the EU. This means in large part, Spain and Greece remain in the EU, and the UK seeks to leave, despite their economic realities. Their choices are fueled by ideas and beliefs, and it shows how strong ideas can be in the face of economic reality.

Like in the UK, there are many who believe we here in the US would be better off pulling out of NAFTA and pursuing protectionist trade policies. Again, the power of ideas is strong and may not correlate with our economic reality. Both North Dakota and South Dakota export beef and grain all over the world, and each have over 28,000 jobs in their respective state that depends on trade with Canada. Pulling out of NAFTA, and having foreign countries apply tariffs on our agricultural products, would have a noticeable effect on many farmers and businesses in our region. I think it is fair to say that several jobs would be cut or lost. So the question which must be examined is, “Is the idea of being less integrated into the global community worth what we will lose by cutting ties?”

http://can-am.gc.ca/business-affaires/fact_sheets-fiches_documentaires/nd.aspx?lang=eng

http://can-am.gc.ca/business-affaires/fact_sheets-fiches_documentaires/sd.aspx?lang=eng

Bigger is Not Always Better in Ag

Years ago, in my second job at a financial institution after college, the savings and loan I worked at was sold to Union Planters Bank.  It really increased the products and level of services we could offer as we were growing from a $270 million asset based institution to a $35 billion one.  The bank also did a pretty good job in getting everyone on board and excited about the change.

One day, the Realtor who had provided me with the most loans in the previous year stopped by.  I proudly told him all the improvements we were going to make because we were bigger. 

He replied, “Bigger does not mean anything but bigger, Phil.”  That statement brought home the stark reality that bigger is not always better.  My Realtor friend was worried that the personal service he received would be lost as we moved to a big bank.

In agriculture this year, we are finding out that bigger is not always better.  We also saw this last year as well.  While commodity prices were high, margins were great, and cash flowed abundantly.  We saw farmers reach out to get more land at top dollar, or build more farm critter habitats as fast as they could put them up.  After all, grain prices were going to go up forever and cattle and hogs would stay strong for a long time. 

Well, those hopes have been slammed against the rocks of slow economic growth around the world.  The fast growth countries of Brazil, Russia, India, China, South Africa, South Korea, Indonesia, Mexico, and Turkey, which racked up 58% of the world’s economic growth before the last few years, are now all mired in an average growth rate of 2-3%.  Half of these countries are in recessions.  The biggest wildcard is China, the world’s second largest economy.  Official reports show growth of 6.5% but some insiders say it is closer to 2-3%. 

When economic growth slows, demand for food products will slow as well.  We are in a situation when this demand is anemic, we see oversupply of commodities compared to demand, and producers are suffering.  Oil prices, which can impact up to 80% of other agricultural commodity prices, have been mired in the $40 range.  That keeps some of the input costs low but also impacts the product price in the end.  A roaring commodity market will hide a multitude of sins when things are going very well, but all can come crashing down when the economy slows. 

When things are really great, it is also a time when there is less focus on the performance of the producer from both the producer’s side and also the lender’s.  Since the situation has reversed now, it takes a paradigm shift on both parts in order to survive.  The problem with some producers, is they expect the lender to bear all the risk with carrying over all the operating debt. 

As with any industry with any type of economy, we have great and poor performers.  When times are great, even the poor guys can look OK.  The problem today is that the poor performers will not likely survive into another year or two in the current environment. 

With our current situation today, it is important to be able to identify those behaviors that may be a part of the poor performer and those of the top producer.  Poor performers may not have adequate supervision of their business.  This can come from a lack of ability or willingness to see things as they are as a producer; it may also mean the unwillingness to listen to trusted advisors.  Top producers will zero in on costs.  The best ones will find ways to cut in the current environment to increase the profit margin.  Top producers are also upgrading their financial records, not only for the lender, but also as a tool to help them make better decisions.  Top produces are also meeting regularly with lenders and other advisors to hear what their ideas are and see their views.

Poor producers are in a trap of a shell game of robbing Peter to pay Paul.  We see this as they attempt to jump from one lender to another to satisfy gaps in operating cash flow.  You may actually also see them trying to double down on an already losing crop.  It is like they are trying to make up for the loss with volumes of more losses!  Top producers will make hard decisions to change course at times which means exiting some business lines or scaling back when the time calls for it.  They may also look at diversifying into other lines of business. 

Look for bubbles in the commodities market and how that may impact the weak producer.  The weak one fails to build extra cash reserves when the bubble is inflating.  This is one reason we see problems with grains in the past two years.  We are also seeing some issues in the cattle and swine producers.  One commodity bubble that may still be inflating today is poultry. 

Our problems today in the ag economy is somewhat muted as we have low interest rates and relatively strong equity positions overall.  Now is the time for the producer to restructure his balance sheet in order to produce some extra cash flow, lower debt, and increase margins.  For many, if we see another year or two of challenge, the time will be too late.

I encourage you to reach out to us at Pactola.  We have some longer term secondary marketed fixed rate farm financing vehicles that can provide a better structure to the debt stack on your producers.  

Demographic Shifts and GDP Growth

Economists are famous for casting predictions that turn out to be utterly wrong.  In fact, many will make multiple predictions that are quite opposite each other.  It is this that inspired Harry Truman to request he be given an economist with just one hand.  That way they could not quantify their statements by saying, “on the other hand”!

One such economist was Irving Fisher.  In early 1929 he predicted the stock market had reached a permanently high plateau, then the market crashed in October. 

One prediction that was off, but slightly less embarrassing was Alvin Hansen’s Presidential address to the American Economic Association in 1938.  He predicted the US economy was stagnating for the long term.  The two factors that were causing this were waning population growth and also a lack of investment. 

His prediction proved wrong.  Starting just after World War II, and going into the 1960s produced the baby boom generation.  Economic growth continued from 1950 to 2007 at a rate of 3.6% per year.  This period was one of great economic prosperity, investment, and innovation. 

However, Hansen’s prediction may not have been wrong, it may have just been 70 years early.  Following the financial crisis, many economists expected GDP to bounce back to previous levels of growth.  But GDP has averaged only 2.1% from 2010 to present and most recently, we have been happy to see any positive numbers.  In fact, it is puzzling the Federal Reserve Chair Janet Yellen, who commented, “Well, growth has been disappointing.  I’m not sure of the reason.”

It is sobering to think the one who we have put in charge of the central bank can’t figure out why growth is anemic!  So let’s help out Yellen out a bit to show what factors are hindering the economy.  Clearly the private and public sector’s debt burden contributes.  Debt dynamics appears to be a topic too complex for the Fed economists to grasp.  Other factors are burdensome regulations that cause business owns to just give up.   In general, these two create a large lack of hope.  If people have no hope, they will not start or grow their business.

These items are complex to grasp.  One that is easier is population trends.  Demographic shifts may help explain what economic growth has been underwhelming in developed countries.  The problems are not limited to the slowing population growth or rapidly aging societies.  The key is the total population size in the middle age window, the time when people earn and spend the most money.  This peaked in Japan late in the last century and has peaked in Europe.  Both these economies have been mired in stagnant growth in spite of everything from negative central bank interest rates to massive money printing to help stimulate business. 

The size of the middle age demographic group in the US, will continue to shrink until 2020.  Demographic changes are a long term economic headwind.  This is a root cause of economic stagnation.  The low interest rate environment is just a sign of economic malaise.  The Fed better wise up to the fact of these hurdles that are before us that limit our economic growth. 

Also bringing more unskilled people into the country is not an answer to create wealth.  One issue we face today is that many of the jobs that are available are in process of becoming scarce.  You can see that with the decline of the number of tellers at your institution. 

Some estimates I have seen believe that up to 1 in 5 jobs that we know today will not be there in the future.  I read of an example of this in San Francisco, where a burger restaurant opened up where the entire burger from start to finish is done by a machine.  You select how you want your burger, and the machine selects the ground beef, puts it in a paddy, cooks the meat, toasts the bun, slices the veggies, melts the cheese, and presents you with the finished product. 

So a lack of skilled workers, who are not in their peak earning and spending years will continue to hammer our economy for years to come.  If this continues, one day we may long for the day when treasury rates are as high as they are now.

How Many Jobs Will Be Lost to Automation?

A few weeks ago, I wrote about “universal basic income,” in which everyone was assured a basic welfare payment from the government to provide to help cover bare essentials. The origins of the idea don’t appear to be founded in the Robin Hood mentality of taking from the rich and giving to the poor, but rather, it was suggested as insurance to help a growing number of people who will lose their job to automation.

Self-driving cars are one form of automation that stand to threaten several jobs throughout the United States. While it may be harder for us to grasp in the sparsely populated Dakotas, self-driving cars are undoubtedly the wave of the future. Simply ask big city dwellers of their importance. It isn’t fantastical for them, but rather a desperately needed technology to cut down on commute times and accidents. Those living in large population centers want to desperately adopt this technology, which will only fuel its development and implementation.

Self-driving cars may further hurt the taxi cab industry. As of 2012, there were an estimated 233,900 taxi cab drivers in the U.S. At that time, the number of drivers was estimated to grow by 16% over the next 10 years. Clearly, Uber and Lyft has sucker punched the industry and those projections, allowing even you and me to be hired drivers in our free time if we so desired. Self-driving cars will likely destroy the need for the remaining taxi cab jobs in existence, leaving traditional cab drivers as a small niche industry filling in for automated cars in small, unusual circumstances.

A much greater impact to the economy may come from automation in the trucking industry. There are 3.5 million professional truck drivers in the U.S., and the median annual salary for a truck driver is $40,000. Self-driving trucks would lead to large cost reductions by not having to pay truckers, and it reduces the need to monitor regulations, such as making sure a driver is getting enough rest.

Whether or not airliners will become fully automated is challenging to say. There are far less commercial pilots than taxi drivers and truck drivers, but they are paid very well. There is an estimated 119,200 pilots employed in the U.S. with a median salary of $102,520. But are we ready to fly in pilotless aircraft?

Automation may not be all bad though. A college student has allegedly created the first equivalent of an automated lawyer, and it is being called “lawyer-bot.” With the median salary of a lawyer at $115,820, an estimated 778,700 lawyers may be out of work. While I’m sure not every lawyer will be replaced with a robot, it is still hard to imagine practicing law with a real person would become a niche industry, like the rarely needed taxi cab driver. Then again, lawyers are pretty good at finding work for themselves, so this may not impact their livelihood that much.

https://en.wikipedia.org/wiki/Taxicabs_of_the_United_States

http://www.alltrucking.com/faq/truck-drivers-in-the-usa/

http://www.forbes.com/sites/parmyolson/2016/06/28/this-teens-lawyer-bot-is-busting-thousands-of-parking-tickets/#1c39d4d310e1

http://www.bls.gov/ooh/transportation-and-material-moving/airline-and-commercial-pilots.htm

http://www.bls.gov/ooh/legal/lawyers.htm

Death By Liquidity?

Can too much cash kill you? It turns out money can be the root of some evils, and holding on to too much of it can not only be hazardous to your credit union, but it harms your entire community!

When credit unions accept deposits, they have choices they need to make. They can take deposits, and they can make loans, or they can take deposits, and buy US government securities. Or they might just take those deposits and do nothing with them. Typically, this means, transferring the money to a corporate credit union, where the money will be lent out in another community.

When a credit union doesn’t use their deposits to make loans, it is foregoing lucrative interest rates. Credit unions need good interest rates on loans to fund operations and pay dividends on share accounts. When deposits are invested in government securities or left at a corporate credit union, they receive substantially lower interest rates. Therefore, it becomes more challenging to fund operations and pay dividends when money is invested that way.

If the credit union has too few loans, then they will not have enough interest to pay for operations.  The interest received from government securities and deposits at corporate credit unions is simply too little to keep the institution viable long-term. This is how a credit union could start to fail, by simply holding on to too much money. In other words, too much liquidity can actually be fatal to a credit union!

Many executives may complain there is a lack of loan demand, which is why they involuntarily hold so much liquidity. Loans can be diverse products, and they should consider if additional loan products can be offered. Maybe you have reached your full potential of automotive and home loans, but what about recreational vehicles? What about businesses and agriculture? What about lending to non-profits and local government entities? If you don’t have the experts to do these loans, then consider hiring them. The better yield on these loans will easily pay for the experts and still prove better than holding cash and securities. And best of all, this puts local deposits to work in your community!

The NCUA has also thrown a lifesaver to many credit unions drowning in liquidity. Starting in 2017, purchased loan participations will no longer be classified as member business loans (MBLs). This means there will be no limit on the number of loan participations a credit union can purchase. This means, credit unions can tap into loan participations all over the country, forever mitigating the issue of retaining too much liquidity. Although to mitigate the risk of lending out-of-territory, it may be best to select a few specific markets and build an expertise in them.

Credit unions are not-for-profits, but clearly they need to make some profit to fund operations, protect against loan losses and replenish capital. The best way to do this is by making loans, and making loans reinvests deposits in the local community. If the credit union is truly suffering from a lack of loan demand, they can always buy participations. If a credit union does not do these things, they will suffer under the weight of holding too much cash and securities. And it seems silly to say it, but too much cash can actually be detrimental for a credit union.

Can Long Term Bonds Be a Value Trap?

Investors who are seeking decent yields are being lured with the siren song of long term bonds.  True, you may be able to get a little higher yield on the longer term, but is it worth the risk? 

As of the day I am writing this, the one-year Treasury sits at 0.56%, five years are at 1.17%, and thirty-year T Bonds are at 2.47%.  So the thirty year is 1.91% over the one year and is 1.30% over the five year.  While these longer term debt notes have a higher yield, in the current market conditions they may cause a value trap that will bring losses in the long run.  As an income source, there is a lot of risk and not much upside.

Sovereign debt is dominated in that nation’s currency could be a one-way bet against the investor.   At one time, when the monetary system was tied to hard assets like gold, long term bonds were a great option.  The investor would receive a fixed stream of payments over time and a return of principal at the end.  Prices could move up or down during the bond term but since money was tied to gold, investors had no reason to expect severe movements.  The retiree could rely on these to fund their retirement. 

This all changed when the U.S. went off the gold standard in 1933.  Once bonds were liked to paper currency, governments were tempted to inflate their currency, thus reducing their debt.  Franklin Roosevelt invalidated gold clauses in that year and at the same time he raised the price of gold from $20.71/ounce to $35/ounce.  US Government debt holders who were to be paid in gold, were repaid in devalued dollars. 

Now with the value of money and the money supply being controlled by the government, long-term bondholders have the deck stacked against them.  The government can be fiscally irresponsible, run high deficits, providing goods and services without paying for them and then finance the increase by allowing inflation.   The government can benefit by paying back the debt with inflated dollars, if the government decides to pay back the debt at all. 

Investors who bought 30-year bonds at 5% in the 1960s believed there was some allowance for inflation built in, saw their principal decline by 75% over the life of the bond.  At some point, investors will get sick of seeing their savings wiped out with the inflation.  As the issue becomes critical, the government will step in to reverse the price increases. 

This is what Paul Vockler did in the 1980s when inflation was lowered from 14% to 4% in a matter of a few years.  Now a bondholder who purchased a 12% long term bond in the early 1980s would have seen a huge increase in their principal value as the yields in the market eroded down to the levels we have today. 

Double digit inflation can cause a lot of damage to the economy.  If inflation ever reached that point, the government would aggressively step in to rein it in.  But even at lower levels of inflation, there is a level of interest payment that make long-term bonds a challenged investment.  The current rate of inflation over the past year is 1%.  If, as an investor, you desire a rate of 3%, then factor in inflation, and add another percent for any uncertainty, gives one a rate of 5%.

Yet the 30-year Treasury sits at less than half of that at 2.47%.  This is 49.4% of par value at 5%.  So the market yield on the bond is less than half of what you should earn.  But with holding a US bond until 2046 is not attractive at the current rates.  A long term hold strategy will also erode your principal on the bonds.  You probably will not want to hold the bond for a long term with the small yield you are making over the inflation rate.  There is still some possibility of an increase in the principal value of the bond if rates are pushed down further.  But the Fed is watching other countries like Japan, Switzerland, and Denmark, and sees that negative rates do not provide the stimulus desired for your economy. 

The bottom line is that in these markets it is hard to get a decent return without taking a little more risk.  There is also a risk in buying and holding US Treasuries at such as low interest rate.  If you desire safety, it may be more reasonable to look at t shorter maturity of security.

Thinking Beyond Yourself

When I was a sixth grade lad in Fulton, Missouri, I attended Carver School.  Our school district at that time had one school building for all sixth graders.  Carver was named for George Washington Carver, the famous scientist and inventor.  Carver is best known for the many uses he discovered for the peanut. 

Carver was born during the Civil War in Diamond, Missouri into a slave family.  A week after his birth, George, his mother, and his sister were kidnapped by raiders from Arkansas.  The three were sold in Kentucky, and among them only George was located by an agent of Moses Carver, the master of George’s family, and returned to Missouri. 

As a youngster, George and his brother traveled 10 miles to attend a school for black children.  At age 12, he left home for good to attend high school, supporting himself by doing chores and work on various farms.  At age 20, he was accepted to attend Highland College in Highland, Kansas.  George’s hopes were dashed when they denied his admittance once they found out he was black. 

So, instead of attending classes, he homesteaded a claim, where he began his biological experiments.  He then was accepted into Simpson College in Iowa, which admitted students of any race.  He worked in a laundry and excelled in painting and music.  One of his works even won first prize at the 1893 World’s Fair in Chicago. 

But even as he excelled in the fine arts, George changed his focus to agriculture.  He told James Wilson, the dean of Agriculture at Iowa State he “wanted to get an agricultural education to help his race.”  Following his skills in the fine arts “would be of no value to my colored brethren…”  George went on to receive a degree in agriculture from Iowa State.  He excelled in botany and horticulture so much so that two professors urged him to stay on as a graduate student.  He stayed and earned his master’s degree, working as an assistant botanist for the College Experiment Station.  He became the first African American faculty member at Iowa State. 

In April 1896, Carver received an offer from Booker T. Washington of the Tuskegee Institute to run the school’s agriculture department.  By doing so he would give up his comfortable life in Iowa, where he was respected professionally and accepted as a member of the community.  He would move to Alabama, in the heart of the deep South, where he would be regarded as a second class citizen. He took the job because he thought of others and wanted to help people in harder circumstances than himself. 

Tuskegee’s agriculture department rose to national prominence under Carver’s leadership.  He earned the respect of other inventors such as Thomas Edison and Henry Ford, as well as several presidents of the United States.  Areas of research and training included methods of crop rotation and development of alternative cash crops for farmers who planted cotton.  This was important after the devastation of the boll weevil in 1892 to the cotton crop.  The development of new crops helped stabilize the livelihoods of people who had backgrounds similar to Carver’s.

Carver’s experiments focused on new uses for crops like peanuts, sweet potatoes, soybeans, and pecans.  He rose to international fame and was made a member of the British Royal Society of Arts in 1916.  He also advised Indian leader Mahatma Gandhi on matters of agriculture and nutrition.  Carver used his celebrity to promote scientific causes for the remainder of his life.  He promoted the importance of agricultural innovation, the achievements at Tuskegee, and the possibility of racial harmony in the United States.  He died in 1943 and was buried next to Booker T. Washington on the Tuskegee grounds.  Carver’s epitaph reads:  “He could have added fortune to fame, but caring for neither, he found happiness and honor in being helpful to the world.” 

If Carver had focused his attention on his talents for the arts, or if he had stayed in his comfortable position in Iowa, he would have never achieved what he did at Tuskegee.  His life was focused on unselfish thinking, trying to help others.  Carver said, “It is service that measures success.” 

Those are great words to live by.  We work in an industry that is not driven by profits, but by the people we help.  It is not focused on the accumulation of cash, but the advancement of our communities.  We are not striving after massive fame, but by memorable friends and families.  Every day, in our credit unions and in our lives, we have the ability to make a difference with our service.  The challenge is to rise above our selfish limitations and to serve others.  That is what will make us great.

A Better Way than Dodd-Frank

By now everyone who works in the financial industry and does not live under a rock down by the river is aware of Dodd-Frank.  This was originally proposed by President Obama and heralded by proponents as the greatest expansion of governmental control of banking and financial markets since the Great Depression, the act was passed in 2010 and was supposed to avert any other financial crisis.  As an aside here, how is more governmental control good, when you have a government that is $20 trillion in debt?

But back to the issue at hand.  Dodd-Frank imposed more government regulation on nearly all aspects of financial services.  It also created the Consumer Financial Protection Bureau. This agency has been described by some as Orwellian.  House Financial Services Chairman Jeb Hensarling stated this week, “We know the best consumer protections are competitive, transparent, and innovative markets, vigorously policed for fraud.” 

In a speech to the New York Economic Club, Hensarling unveiled a new proposal that will overhaul and replace most of the Dodd-Frank Act with a more market based regulatory scheme.  The proposed plan is touted as being much simpler than what has been created.  The focus on the plan is to help grow the economy.  Hensarling stated, “We need economic growth for all and bank bailouts for none.”

Hensarling counters the theory that deregulation created the financial crisis.  His statements point to regulation by the Washington elite as the root cause, citing the example of Fannie Mae and Freddie Mac requiring lenders to loan money to people who could not afford the house they were buying.  Hensarling quotes economist Friedrich Hayek’s book Fatal Conceit, describing the 2,300 page law as an example of “Washington’s elite deciding they’re smarter and can somehow manage the economy better than the rest of us.” 

There has been discussion in the credit union industry to have the CFPB to treat all credit unions as exempt.  Hensarling’s proposal uses a regulatory off-ramp.  Banks that hold a high level of capital and maintain a robust balance, sheet would be able to escape much of Dodd-Frank.  The representative believes that the requirement will not have as much of an impact on smaller, more local lending institutions.  Larger banks may have to raise more capital. 

The plan encourages industry discipline.  Hensarling said it is “having your own money at risk as opposed to having a taxpayer backstop which provides the privatization of profits and socialization of losses.”  The removal of the bailouts and adding higher capital requirements may see more of the downfall of institutions deemed “too big to fail.”  The plan would create a new avenue of controlled bankruptcy for a troubled institution with assets over $50 billion.  Larger banks would likely become smaller. Any credit obtained from the government would be priced according to the risk they pose without any government guarantee. 

The plan to break up large money-centered banks, thus creating more competition will be good for the consumer in giving more choices.  The work to help expand the field of membership in credit unions will assist in expanding the menu of options.  Leaving more financial options in the free market will go against a trend to turn the financial industry into the equivalent of a utility.  This would prevent either side from politically allocating credit. 

Increased regulation has hurt smaller credit unions and banks.  The pleas of these institutions has fallen on deaf ears of those who impose the new regulations who are content to allow a slow death of the small financial institution. 

This process is worth watching.  It would be nearly impossible for this to pass in the current political environment but it could serve an important part of the future agenda.

Have the Swiss Gone Mad, or is it a Sign of Things to Come?

A few years ago, Switzerland proposed an ambitious way to limit the pay for CEOs and other executives. They suggested limiting executive pay to no more than 12 times the salary of the lowest paid person in an organization. Consider someone making $10/hr, they would have annual earnings of $20,800. That means executives couldn’t make more than $249,600. The average CEO compensation for a Fortune 500 company is $13.8 million. As you can see, this would cause massive disruption, with either executives quitting en masse or labor expenses spiraling out of control. Much of a CEO’s compensation is variable, because it is based on profitability. Salaried workers are often treated more like fixed expenses (even though labor needs are arguably variable), so dramatically raising their pay creates a much higher operating cost, and thus, more risk for these companies. This measure failed by 65%, which suggests nearly 1/3 of people supported the measure.

Now the same country that brought forth the idea of capping CEO pay has a new idea they are investigating: universal basic income. The way it works is based on everyone getting a check from the government to cover their basic needs. If the poverty level is $25,000 a year for a family of four, the government simply writes them a check for $25,000. Makes perfect sense right? I’m sure your head is about to explode. Take a deep breath! This measure too has just failed in Switzerland, with 77% voting opposed.

While eradicating poverty is a worthy pursuit, you are no doubt running through a long list in your head of what is wrong with this proposal. Inflation, will the funds be spent on basic needs, work disincentive, etc? To my surprise, the idea didn’t actually originate in Switzerland, but it came from here in the United States. And it had little to do with eradicating poverty, but was rather posed as a solution to deal with the increasing automation of jobs. I can’t find a direct reference for this, other than it is mentioned in the attached NY Times piece. In this circumstance, the proposal isn’t a suggested fix to those who need a hand up, but rather a consolation prize to many who are about to lose out.

The idea might resonate to those being forced out of the workforce, and we know this a problem which is continuing. Labor participation rate continues to lag, from roughly 67% at the turn of the century, to nearly 62.5%. It is widely believed part of the reason the unemployment rate has sharply declined since the last recession, is due to many disenchanted people having given up looking for jobs.

Once more, I desperately call for fiscal policy to provide a fix. The American worker is suffering because of high political uncertainty and lack of policy that can provide incentives for new businesses and job creation. Entrepreneurship has declined for decades, and existing companies are fearful of making long-term investments. With a dysfunctional relationship between Congress and the President, it is ordinary Americans who are bearing the brunt of increasingly stagnant economic conditions. Our elected leaders, on both sides of the aisle, are failing to adapt our economy and policies to the current reality, which will only make ideas like universal basic income seem more enticing to future generations.

https://www.glassdoor.com/research/ceo-pay-ratio/

http://www.bloomberg.com/news/articles/2013-11-24/swiss-voters-reject-strictest-executive-pay-limits

http://techcrunch.com/2016/06/06/swiss-reject-universal-basic-income-in-public-referendum/

http://fivethirtyeight.com/features/hiring-really-is-slowing-down/

http://www.nytimes.com/2016/06/01/business/economy/universal-basic-income-poverty.html?_r=0

http://www.inc.com/magazine/201505/leigh-buchanan/the-vanishing-startups-in-decline.html

http://fivethirtyeight.com/features/the-slow-death-of-american-entrepreneurship/

Will the Fed Raise Rates? Probably.

There is a lot of discussion about the Federal Reserve raising the Fed funds rate. This is typically done to counter inflation or prevent reckless economic expansion. As we all know, there isn’t much pressure from inflation currently, with the last reading coming in at 1.1%. Then it begs the question, is our economic expansion really that strong that the Fed needs to start applying the brakes? I constructed the following graph below to show what quarterly GDP growth looked like leading up to the Great Recession, and as you can see, it was a period when the Fed was starting to strongly apply the brakes with higher interest rates. The overnight rate peaked at 5.25%, and GDP was consistently above 2%, and over 3% in half the quarters presented.

Now compare that to our current economic picture, for which I constructed another graph you can observe below. In less than half of the quarters in the last 4 years, have we seen GDP at or above 2%. And take note, before the Great Recession, the Fed was raising rates and the economy was still exceeding 2% regularly. As you can see below, the Fed only raised rates at the end of 2015 for the first time since 2006.

Still, while the economy doesn’t seem as strong as before, it isn’t bad. There are 7 quarters that jump above 2% growth, 4 that were above 3% growth, and even a couple that exceeded 4% growth. The economy is rolling, so how fast does it need to roll before the brakes of higher rates should be applied? That is subject to great debate at the Fed, and some feel now is the time to start applying those brakes. Especially considering, maybe years leading up to the Great Recession were too hot with growth, and maybe the Fed wasn’t applying the brakes enough. In this case, it might make sense to start raising rates now to keep momentum from flying out of control.

I believe there might be a different reason the Fed wants to raise rates, and that is they fear they will not be able to stimulate the economy by lowering rates if we happen upon another recession. As you can see in the following graph, the Fed saw the economy was stopping and about to move backwards, so they released the brakes as fast as they could. They decreased interest rates from 5.25% to 0.00% in a matter of 18 months! While we cannot say the Fed is definitively responsible for what came next, we can see from the graph we entered a deep recession, but it was relatively short-lived given how deep it was. The low interest rate environment may have helped keep credit affordable so businesses could quickly recuperate.

So the Fed is faced with a dilemma. They aren’t sure when it is the right time to raise the rates, but they know the economy isn’t as hot as it was before the recession. And, with rates so low they are lying on the floor, they won’t be able to really decrease rates to stimulate the economy back to life if another recession hits. Yellen has repeatedly indicated that the Fed will continue to watch the news and analyze current data to determine if the economy is picking up speed, so they have a reason to raise rates. And with rates on the floor, they very much want to raise rates to give them a policy tool again.

I would argue you don’t have to look hard anymore to find news for Yellen and the Fed to make their case that now is a good time to act. This week alone, I’ve seen articles on CNBC identify the strong expansion of home flipping in recent quarters, and Wells Fargo’s announcement of allowing smaller down payments on homes. To put the icing on the cake, Jamie Dimon at JP Morgan Chase brought auto loans to everyone’s attention. Borrowing for cars has reached record highs, with record high payments, and record high terms. I can definitely hear the brakes screeching at the Fed. I fully expect we are in a rising rate environment.

http://www.cnbc.com/2016/06/02/jamie-dimon-just-sounded-the-alarm-on-auto-loans.html

http://www.cnbc.com/2016/05/26/wells-fargo-launches-3-down-payment-mortgage.html

http://www.cnbc.com/2016/06/02/house-flipping-heats-up-creating-home-price-pressure-cooker.html

http://www.usinflationcalculator.com/inflation/current-inflation-rates/

Advantages of Adversity

One of the best ways to learn about yourself is through adversity.  Adversity always gets our attention.  When we are in the fires of the furnace of trials, it can help burn off the dross and leave the pure metal.  Former Egyptian President Anwar Sadat once said, “Great suffering builds up a human being and puts him in the range of self-knowledge.”

But too often, when the storm of adversity comes in, we have a tendency to hide.  We resist the pain and seek to hide.  We may build a fortress to prevent further adversity.  Our attitude is like that from Sargent Schultz in Hogan’s Heroes.  “I know nothing.  I see nothing.”  This is their response to hard times. 

Yet, adversity can be a huge teacher to us.  James Allen wrote in the book, As a Man Thinketh, “Circumstances do not make the man; it reveals him to himself.”  Novelist Samuel Lover once wrote, “Circumstances are the rulers of the weak; but they are the instrument of the wise.”  Yet, it is really easy to ignore adversity and fail to learn its lessons.

One of my fraternity brothers, Mark Taylor, used to love telling this story.  A wealthy man had two sons.  One was always sour on life, had a negative attitude, and complained about everything.  The other one was always thankful, looked at the positives, and found the best in everything around him. 

One Christmas, the father decided to do an experiment to see if he could change the attitude of either son by giving rewards or adversity.  He gave the son with a sour attitude a roomful of toys.  Every kind of neat toy, computer, and electronics device filled the room.  The son with the great attitude, he filled his room full of horse manure. 

On Christmas morning, the father told both sons that he had their presents in their rooms.  Both boys joyfully ran to their rooms.  After several hours, the father came up to the son’s room who always had the sour attitude.  To his surprise, the son was sitting in the middle of his room crying.  He was complaining about all the wonderful toys he was given and how he could not get everything to work.  He could not assemble the toys, computers were not working, and the iPads were frozen.  Even though he had all these wonderful gifts, still he continued to complain.

He went down the hall to the second son’s room.  To the father’s surprise, the son was joyfully shoveling manure as fast as he could out the window.  The father asked, “Why are you so happy?” 

The son answered, “Because dad, with all this manure here, there has to be a pony in here somewhere!”  Here is a picture of someone looking through the adversity to see the positive!

Adversary can teach you more than pleasure or success.  Robert Browning Hamilton wrote a poem once about this.

I walked a mile with pleasure,
She chatted all the way.
She left me none the wiser,
With all she had to say. 

I walked a mile with sorrow;
And never a word said she,
But oh the things I learned from her,
When sorrow walked with me. 

In the end, the trial can be the best teacher to better understand ourselves, if we will choose to be educated by adversity.

The Retail Breakup

With the economy recovering after the crash in 2008, many in the retail industry were hoping the mass of store closings would subside and become past history.  Even though retail appears to be much more solid than it was five years ago, store closings are going up.  In 2015, 5,866 stores were closed in the US, this is a 7% increase over the store closings in 2014.  Cushman & Wakefield estimates that store closings can surpass 6,200 units this year. 

Store closings run a variety from department stores, grocers, apparel, and electronics stores.  These include some major big box retailers like Office Depot, Macy’s, Sears, and Barnes & Noble.  Examples of this are Sports Authority, who filed Chapter 11 bankruptcy in March and announced it is thinking about closing 140 of its 450 stores.  Walmart is closing 154 stores in the US, most of these are the smaller Walmart Express format.  Best Buy is closing some stores as leases expire, including 30 stores last year.  North of the Border in Canada, Target closed 130 stores. 

There are several factors that are influencing the decline in retail.  Planners for retail companies are rethinking the old time brick-and-motor strategies now that there is such strong growth in online retailers and e-commerce.  Online now comprises of just under 8% of all retail sales.   Retailers are seeking to expand their on-line presence.  Underperforming stores are looked at with more scrutiny.  Retail companies are shrinking store footprints and looking for locations that are more favorable.  Basically, retailers are being much more selective on where and how to expand. 

Some may question the health of this recovery.  With nearly 94MM Americans out of the work force, there is less potential disposable income to be spent in stores.  Personal income has had anemic growth since 2008.  Less income creates stagnant growth for demand for goods and services.

Demographics also has an impact on demand for goods and services.  As Baby Boomers retire, they have less income and typically will purchase fewer goods.  The next demographic group, Generation X, is quite a bit smaller in numbers than the Boomers.  So as the Boomers retire and Gen X gains in assets and disposable income, their impact on demand will be less due to their lack of numbers.   Millennials have more numbers than Gen X, but their impact on demand for goods and services has not been felt as they tend to not have as much disposable income and assets as previous generations.  Also, their buying habits will change the landscape of retail.

Small shop space may often have a list of possible tenants; bigger box stores create a bigger challenge.  There are fewer possible tenants because of retail bankruptcies and consolidations, which have taken possible tenants out of the market.  Other big box retailers are actively looking to shrink their square footage footprint.  Even in areas where a big box retailer is expanding and there are often options from other open buildings, the empty building may not be suitable due to location or demographic concerns. 

One option for empty larger box stores is to divide the space.  In Pueblo, Colorado, the Walmart on the north side of town built a new supercenter, leaving an older Walmart building vacant.  The building owner was able to fill the space with putting in a Big Lots Stores in the majority of the space.  They then filled in the rest of the space with a restaurant, thrift store, and offices. 

Retail construction in the US has also fallen dramatically.  In 2005-2008, new retail space averaged around 250MM square feet.  This amount dropped to less than half of that in 2009 and has not come close to recovering from the pre-crash level.  New retail space last year ended around 80MM square feet. 

Overall, these factors present strong headwinds for the retail industry, especially in the big box area.  As large companies seek to find methods to increase profitability, they will focus on more efficient methods to deliver their goods to clients at lower prices or utilize more targeted methods to generate sales.  All of these may create more empty big box retail space. 

Can a Credit Union Serve Immigrants?

There are 42.4 million immigrants in the United States, which makes up 13.3% of our total population. If you include the children of those immigrants who were born in the United States, that totals 81 million people. This means that 26% of our total population are families with immigrants!

I feel this reinforces many facts we often forget. We are a nation of immigrants, immigrants have always been key to our population and economic growth, and a substantial part of our population continues to be first generation Americans.

I think sometimes the rhetoric in the news about immigrants tends to overwhelm people, and media consumers are encouraged to view the immigrant population with suspicion. We forget immigrants are really quite ordinary people who need ordinary services, like a place to deposit a paycheck or a place to get a car loan. When I was a bank examiner, I came across a bank that filed a Suspicious Activity Report (SAR) on a dentist, because he was foreign born. There were really no other factors that seemed suspicious or unusual about the man, other than he was from abroad, and now needed access to banking services as he practiced dentistry in the United States. To me, this seemed like a bit of an overreaction.

But for many of us who have lived our entire lives in the Dakotas and do not have frequent exposure to immigrants, how are we supposed to know when it is okay to bank with somebody who wasn’t born here? I think it is a legitimate question, so let’s look for some legitimate answers.

The key phrase you will usually encounter when dealing with government worded guidance is that someone must be a “lawfully admitted alien.”  The definition of “lawfully admitted” means an alien remains in status as a permanent resident, conditional permanent resident, or temporary resident.

The hardest status to understand is the category of temporary resident. A temporary resident has a visa to study or be employed in the United States, but cannot remain here as a permanent resident; whereas, a permanent resident can remain in the United States indefinitely and possesses a famed “green card.” Therefore, you may need to take into consideration the length of stay for a temporary resident, but a permanent resident shouldn’t be viewed any differently than an ordinary citizen. A permanent resident will have a social security number, driver’s license, and can work most jobs in the United States, but cannot engage in the political process.

If a permanent resident chooses to become a citizen and is successful in doing so, they become a “naturalized” citizen. Naturalized citizens are afforded all the same rights, responsibilities, and opportunities as a citizen, except they cannot be President of the United States. They can still engage in the political process and even hold elected office. An example would be Arnold Schwarzenegger, who was born in Austria, but became a naturalized citizen, and later became governor of California.

No matter someone’s legal status, you are always going to check the OFAC list before doing business with them, and collect the identifying information. Even if someone is an immigrant, any naturalized citizens or permanent residents will possess the same documents for identification as any natural born citizen. So in reality, having immigrants as members should be no different than members born in the US. And, I would argue that the fact they are immigrants alone shouldn’t raise suspicion or concern.

http://www.migrationpolicy.org/article/frequently-requested-statistics-immigrants-and-immigration-united-states

https://www.immigrationsupport.com

Leaders Help the Team to Enlarge

I have been on the road a bit lately.  One evening I found myself in the hotel flipping through channels and stopped at the movie Braveheart.  I love the movie and the story behind it.  In 1296, King Edward I of England crossed into Scotland with a large army.  Edward had just recently subdued the Welsh.  He set up a puppet king in Scotland and then bullied that king until he rebelled, giving Edward a reason to invade Scotland. 

King Edward sacked the castle of Berwick and killed all the inhabitants.  Other castles surrendered quickly.  Many believed that the Scots were destined for the same fate as the Welsh.  But they did not take into account the efforts of one man, Sir William Wallace.  Wallace is still revered as a hero in Scotland today.

In Braveheart, Wallace is shown as a fierce and determined fighter who valued freedom above everything else.  William was the second son and was originally groomed to be in the clergy.  He was taught the value of ideas, including freedom.  William grew to resent the oppressive English after his father was killed and his mother sent away to exile.  William became a fighter when a group of Englishmen tried to bully him and by the age of 20 he was a highly skilled warrior. 

During this time, warfare was usually conducted by highly trained knights and professional soldiers.  The larger and more skilled the army, the greater the power.  When mighty King Edward faced the smaller Welsh army, they did not stand a chance.  But the Scots were different.  Wallace had the unusual ability to draw people around him, and to make them believe in the cause of freedom.  He inspired and equipped them to fight against the seasoned worriers of England.  He caused them as a group to ban together and enlarge their abilities. 

Wallace was unable to defeat the English and gain the independence of Scotland.  When he was 33, he was executed.  But the legacy of enlargement, of having a group believe in something greater than themselves, carried on.  In the year after Wallace’s death, noblemen Robert Bruce claimed the throne of Scotland. He carried on Wallace’s example and the peasants and nobility banded together. Scotland gained its independence in 1314. 

Team members always admire a player who is able to help the team go to another level.  I always admired that about Michael Jordan.  He was able to help the level of everyone around him play beyond their talents.  By doing so, the Bulls were able to win six championships. 

John Maxwell writes about the characteristics of leaders who enlarge their team.  Enlargers first value their teammates.  Charles Schwab once stated, “I have yet to find the man, however exalted his station, who did not do better work and put forth greater effort under a spirit of approval than under a spirit of criticism.”  The approval we show helps others give and achieve more.

Enlargers also value what their teammate’s value.  Leaders who do so learn what things are important to their team members and understand it.  Their ability to relate to their fellow players creates a strong connection among the team.

Enlargers add value to the individuals on the team.  This is often finding ways to improve the individual team members’ gifts, attitudes, and abilities.  The mining of these skills, gives the individuals the ability to use their talents more freely, thus increasing the reach of the team.

Finally, an enlarger will add value to themselves by how they have added value to others.  You cannot give up what you do not have.  An example of this, now that we are in NBA playoff season, is a basketball great like Karl Malone is helped greatly by a great passer like John Stockton.  If you want to increase the value of your team, add value to yourself. 

As a leader the question here is if you help others on your team achieve more and enlarge them, or do they wither under your leadership.  For a team to accomplish great things, it starts with the leader believing, serving, and adding value to others on the team before they do the same for you.  

The Science of Management and Leadership

The many of the sciences not connected to the physical understanding of our world are often criticized for not being real sciences. These critics are incorrect with this complaint, as rigorous mathematics and statistics has been repeatedly applied in fields like economics and political science to demonstrate a very accurate understanding of society, people and their behavior. Moving further from the physical world, I had no appreciation for how much the fields of management and leadership had been developed into sciences. While it these fields may not easily lend themselves to experimentation, they have revolutionary theories that continue to affect our progress as people.

A key assumption that management science has debunked is the idea of the natural born leader. As it turns out, a person’s physical appearance or natural predisposition does not automatically make them naturally fit to lead people. Rather, leadership is a skill that is learned and can be taught. Research is beginning to reveal that the most successful people tend to be sociable, which is also a quality that can be learned and taught. But being sociable alone will not make someone a great leader, but it may be one of the most important prerequisites.

A successful leader is not necessarily someone who has been granted legitimate authority to tell people what to do, but rather one who can influence the way people think and motivate them. Here is where learning and studying leadership is important, because it is easy to be mistaken about what actually motivates people. Some leaders feel that pay and benefits motivates people, when in fact, these things can’t or won’t motivate people for any significant amount of time. Why not, since these are clearly things that people desire? As it turns out, research in management science has revealed that satisfaction and dissatisfaction are not two points on the same scale, but rather two completely different scales! This intuitively makes sense, when you consider that there are some jobs you may not be willing to work, no matter how high the pay is. Why? Because the dissatisfaction will overwhelm the satisfaction of receiving money.

Frederick Herzberg summarized this by introducing the “two-factor theory” to the field of management science. Herzberg explained there are two factors affecting people’s job satisfaction, which are motivators and hygiene factors. We understand that motivators motivate, but what do hygiene factors do? Hygiene factors are factors that will lead to dissatisfaction if they are not met. Hygiene factors include pay and benefits, but also include things like work conditions and vacation. Then what are actual motivators? Surprisingly, motivators correspond with higher order needs, and tend to be things like challenging work, recognition for one's achievement, responsibility, opportunity to do something meaningful, involvement in decision making, and a sense of importance to an organization.

As you can see, motivators correspond more with emotional needs, whereas hygiene factors correspond with basic psychological needs. Then it may not come as a surprise to learn that management science is finding most successful leaders are those that are empathetic, which means they are mindful of the thoughts and emotions of others. While this seems obvious, it runs counter to how many leaders manage. I speculate this is because satisfying emotional needs is difficult and time consuming, and altogether an issue that makes many leaders uncomfortable. A good leader must learn to overcome these uncomfortable conversations, and accept it is a natural part about understanding and motivating people.

https://en.wikipedia.org/wiki/Two-factor_theory

Building Business Relationships

It requires a different mindset and strategies to build a desirable commercial and business portfolio than it does to build consumer business.  On the consumer side, a financial institution prepares the product, produces advertising through a variety of media:  radio, internet, TV, billboards, statement stuffers, etc.  Once the marketing campaign is out in the public, the attitude is to sit back and see what the marketing will bring in the door for consumer business.

Once when I worked for a savings and loan, we had a promotion to give away a Rubbermaid stepstool that doubled as a tool box.  Each new deposit account would get one.  We stacked hundreds of these in our branch, put out the marketing and waited for the results.  People filed in to open an account and get a step stool.

Business development on the commercial or agricultural side does not work that way.  This presents a problem for credit unions who attempt to build a successful portfolio using the same tools that they do on the consumer side.  Marketing on the commercial side is more about raising brand awareness and is designed to get your foot inside the door of the companies you desire to service, not to bring those clients to your branch.

Commercial marketing is quite strategic.  It involves identifying the type or industry to target or even identifying businesses to bring into the credit union.  It requires that one join different groups or trade associations where your targets frequent.  Waiting for your desired clients to come to you will not produce the results that you want.  On the commercial and business side, people go where they already have a relationship.  If they don’t have a relationship with you, the walk in is usually someone who is just looking for some method to have his business financed.  Many times these folks have already been turned down somewhere else.  This is often not the recipe for a desired borrower.

The sales cycle for commercial is also very unpredictable.  It can be very short, if just happen to meet a business who is actively seeking to start a new banking relationship.  It can also be quite long.  One of the largest commercial relationships that I started when I was a commercial banker, took me five years of relationship building to win.  We ended up getting $17MM of loans and $20MM of deposits.  It was also one of the most financially sound companies in the entire portfolio of the bank.

So how do you handle commercial relationship development with such an unpredictable sales cycle?  First, realize that advertising is primarily for brand awareness on the commercial side.  Next, identify the businesses you want to target.  This can be by industry like family doctors, dentists, attorneys, or mom and pop shops.  It can also be a target business that you want to bank.  It can also be a mixture of both targeted businesses and industry.

These targeted entities should create a series of calls.  You need to build relationships and make friends.  If your portfolio is not as big as you want it, you need to go make more friends.  This will require that you work with some desired customers for years before you see the fruit from the tree that you have planted.  In some cases, it will come a lot sooner.

Find groups that you can belong to where your targets hang out.  This is the same as finding the right spot where the fish are biting on the river and getting your fly rod in that area on a regular basis.  Don’t seek to sell people there, seek to build relationships.  Remember people hate to be sold, but they love to buy.

Good commercial portfolios do require different tools and skills than most of the retail mindset that runs throughout the credit union industry.  But with the right tools, you can be successful.