news.cuna.org/articles/109658-anatomy-of-a-turnaround
2016-02 Anatomy of a Turnaround

Anatomy of a Turnaround

How CUs pushed to the brink by the financial crisis regained their footing.

March 11, 2016

Even at the lowest point of the Great Recession, most credit unions didn’t lose their focus on lending.

That’s what stands out for Mike Schenk as he looks back on that time. “Credit unions were helping members, and kept lending all the way through,” says Schenk, CUNA’s vice president of economics and statistics.

Despite those efforts, the recovery took longer than economists predicted, and overall consumer borrowing slowed significantly. Credit union loan growth fell to -1.2% by 2010, Schenk notes. 

A new CUNA CFO Council white paper—“The Art of the Turnaround: How Credit Unions Fought Their Way Back”—profiles the challenges several credit unions faced at this time. It examines how they revised policies, created new business models, and revamped strategic plans to strengthen their bottom lines and rededicate themselves to meeting members’ needs. Here’s a look at two credit unions featured in the white paper.

Source of the problem

Antioch (Calif.) Community Federal Credit Union saw firsthand the impact declining property values had on its earnings and overall financial health.

During the recession, declining property values in Antioch meant the city lost revenue and businesses closed. City employees—which make up 40% of Antioch Community Federal’s 1,619 members—suffered job losses and a decrease in work hours. The credit union recorded six years of negative earnings from 2007 to 2012.

“This had a direct impact on our credit union, resulting in delinquent loans and repossessions, foreclosures, business loan losses, and members strategically walking away from their homes,” says Anna Tellez, president/CEO of the $23.9 million asset credit union.

Before the recession, Tellez says the credit union’s delinquency and loan losses were relatively minimal. Its strategic planning facilitator and NCUA examiners advised the credit union to diversify its portfolio to take on more risk.

Antioch Community Federal put into place risk-based lending policies and procedures to fund some riskier loans and formed relationships with local boat and recreational vehicle (RV) businesses. 

“But when the economy took a turn for the worse, many of our members gave up their toys, voluntarily turning over their boats and RVs for repossession,” Tellez says.

Looking for answers

With Antioch Community Federal’s capital dropping from 12.11% in January 2007 to a low of 7.37% in 2013, Tellez says the credit union needed a new strategy.

“We developed a capital restoration plan, identifying capital ratio thresholds and developing steps to mitigate additional losses and increase income,” she says.

Those steps included modifying and restructuring members’ loans to lower rates and payments to prevent additional losses, freezing real estate lending and business loans, and placing tighter restrictions on RV loans, such as requiring larger down payments and shorter loan terms.

The credit union also froze employee salaries, eliminated a bonus program, reduced retirement contributions and other benefits, implemented a hiring freeze, and eliminated two staff positions.

Other measures included renegotiating vendor contracts, decreasing janitorial services, and requiring staff to assist in cleaning their work spaces and take care of the office plants. Plus, Antioch Community Federal reviewed and revised its fee schedule, reduced dividend expenses by suspending its share certificates, and added products and services that generate fee income.

Fixing broken policies

While Mazuma Credit Union in Kansas City, Mo., experienced many of the same financial pressures as Antioch Community Federal, it was largely due to inconsistent lending practices, says Brandon Michaels, president/CEO of the $543 million asset credit union.

Consumer and business lending teams weren’t on the same page when it came to acceptable types of collateral for lending transactions, Michaels says. Other issues included high concentration risk, poor underwriting, and inaccurate reporting.

It’s no surprise then, Michaels says, that these practices contributed to the credit union’s “severe” financial downturn.

Mazuma, Michaels says, was “essentially approving almost everything.”

The credit union’s solution came in the form of an aggressive “clean-up” plan. During a two-year period, Mazuma implemented a plan that decreased its business loan portfolio from $60 million to $15 million, much through charge-offs. Some of the loans were backed by the Small Business Administration, which limited the exposure to the credit union, Michaels says.

Still, the turnaround was difficult and required the executive team to proceed with caution and “keep the faith,” he adds.

When Michaels joined Mazuma as chief financial officer in 2009, the credit union had a 92% loan-to-share ratio, a number that is closer to 70% today. The credit union also had 9% net worth after losing nearly 200 basis points of capital.

“Charge-offs were scary,” Michaels says. “Provisions for loan losses exceeded millions of dollars, and we saw the organization slipping away.”

Lessons learned

While bringing their credit unions back from the brink and turning them into thriving institutions was difficult, leaders at both Antioch Community Federal and Mazuma reflect on important lessons learned. 

Today, Antioch Community Federal’s balance sheet and capital ratio continue to improve. The credit union received a low-income designation and Tellez says it might also pursue the community development financial institution designation this year.

This experience taught the credit union’s leaders to carefully monitor loan concentration limits and to review all mortgages on a quarterly basis for property
values and members’ credit scores, and histories, Tellez says. An outside vendor now prepares quarterly asset/liability and other financial reports for Antioch Community Federal.

One key piece of advice Tellez offers: Don’t stretch too far for yields, despite what examiners may say.

“I tend to implement and make changes based on the examiners’ recommendations. In hindsight, if we hadn’t implemented some riskier loans, I believe our losses wouldn’t have been as great.”

Leaders at Mazuma also realized that while the allure of loan income can be hard to resist, members and the credit union’s financial well-being are the most important factors to consider when making loans.

“Understand your expertise and don’t stray from it,” Michaels says. Don’t lose sight of your greater purpose, he adds: protecting members’ money and ensuring the credit union’s solvency for future generations.