Turnarounds Take Teamwork

Strong leadership, a capable team, and demanding work are required to bring a CU back from the brink.

In any workout situation, success depends not just on one leader but on a team of talented individuals willing to focus, work hard, and sacrifice. That principle applies to more than sports teams. It also describes the challenge facing credit unions in decline-the need to turn a bad situation around or face possible liquidation.

Every year, credit unions across the country work with the National Credit Union Administration (NCUA) or state examiners on a variety of problems. Their numbers are small and generally have declined in the past decade.

But while the amount of troubled credit unions doesn't add up to a huge problem on a national scale, financial decline is an ominous threat to managers, board members, and employees of any single credit union.

Any number of factors can get a credit union in trouble, says NCUA Region V Director Melinda Love. A slowdown in a credit union's regional economy or in its sponsor's economic sector can cause problems. So can fraud or embezzlement, often coupled with poor record keeping. Other factors include faulty decisions regarding investment vehicles or new products, use of delivery systems that challenge managers' abilities to ensure due diligence, and changes sponsors make.

Regulators rely on indicators to determine when and where to step in to protect a failing credit union. A low capital ratio is a big factor. When it drops to less than 2%, conservatorship is a likely consequence, although it's only one of several actions regulators can take. Under conservatorship, NCUA or state regulators remove a credit union from the purview of its directors and place it in the hands of a conservator.

"We look at conservatorship as a last-ditch effort and a tool we use only in the most egregious circumstances," Love says.

After conservatorship, there are four possible outcomes: The credit union can be returned to members, merged with another credit union, purchased and subsumed within another credit union, or liquidated. Of 35 credit unions NCUA placed into conservatorship in the past decade, 12 were returned to members-obviously the happiest of outcomes.

Following are some credit union success stories. While additional laws and regulations have come into play since some of these turnarounds took place, the point remains the same: It takes teamwork to turn things around.

Service with pride

Research Federal Credit Union, Warren, Mich., grew with General Motors, opening in 1936 in the midst of the Great Depression. In 1991, with assets of $69 million, Research Federal was hit with a $7 million loss from a fraud scheme in its indirect lending program.

Already struggling with a slow economy, the credit union was in trouble. Capital was less than 1% due to the loan loss, staff salaries were frozen, and morale was low. The board of directors hired Catherine Roberts, now president/ CEO, who had turned around another credit union.

Roberts knew the value of respecting the team in place and using its talents. Her first step was to write to credit union staff at their homes, asking for their help.

Their confidential replies told of two major problems: poor service and a lack of training. Low staff salaries, coupled with little training and an outdated computer system, led to inadequate service and unhappy members. The credit union hadn't grown for six years.

Roberts was the right person to deal with a cultural malaise. Her personal philosophy is that life doesn't end when you punch the time clock at the beginning of your shift and resume when you leave work at the end of the day. Work should be part of living. She parlayed that into a vision for a revitalized culture at Research Federal.

That vision called for making a significant investment in computers, training, and salaries. In return, while open to complaints and suggestions, Roberts forbade staff to make negative comments outside the walls of her office.

She required as a condition of her employment that the board surrender full operational control to senior management, to which it agreed. This was to instill and nurture a can-do attitude in employees and to make the credit union a place where members and employees could enjoy spending time.

Research Federal also employed a simple yet profound business strategy: "A lot of businesses these days don't feel compelled to offer great service," Roberts explains. "We chose service as our dominant driver."

In addition to improving employees' attitudes toward service, one challenge involved the nature of the membership, 45% of whom earned more than $100,000 per year. Competition for members' business was stiff.

Research Federal implemented concierge and other executivelevel services. Staff would close a loan anywhere-office or home. They always sought new ways to invest in a top-grade service culture.

Since 1991, Research Federal has more than tripled its assets, now at $220 million. Membership has increased only 4%-to 26,000-but all members now use the credit union.

The improvement involved costs. In addition to the monetary investment, there was a 40% turnover in staff the first year because of increased attitude and performance expectations.

"There's a great deal of pride today among our staff" Roberts says, "because they know they participated in a remarkable turnaround for this credit union."

Recession strikes a blow

In the late 1970s, long before President/CEO Jeffrey H. Farver joined San Antonio Federal Credit Union, it was suffering loan problems and losses due to an oil price collapse in the midst of a Texas recession. To cope, Government Employees Credit Union, its name at the time, focused on business loans.

By the early 1980s, with oil prices rising and the state's economy apparently recovering, Government Employees grew business lending to $200 millionhalf of its total assets.

But the recession wasn't over. oil prices dropped again, and unemployment increased, as did bankruptcies. Businesses defaulted on their loans.

By 1985, the fifth largest credit union in the nation was in trouble. NCUA intervened, creating a new board of directors and new leadership. But they failed to turn the credit union around.

By 1990, losses had taken capital to minus $36 million. Farver was brought in from Tennessee, where he had overseen another credit union turnaround, to create a new strategy for Government Employees. "Our first step was to build a wall around the commercial loan problem," Farver explains.

With its solid member base, Farver figured that isolating the commercial lending problem would allow Government Employees to focus on serving individual members. Management zeroed in first on indirect auto loans and then on home, home improvement, and education loans to generate assets and grow out of the problem.

In another turnaround situation in Florida, Farver had learned the danger of allowing the press to get wind of a credit union's troubles. To avoid a run on the credit union, his team emphasized the positive changes, including the new name: San Antonio Federal Credit Union. To members and the public, the credit union appeared to be putting on a new face and offering more services more aggressively.

The strategy worked. By 1993, San Antonio Federal's capital ratio was back up to zero. Three years later, it was at 6%. Membership grew from 100,000 in 1990 to the current 230,000 members.

The word Farver uses to describe San Antonio Federal's position now is "awesome," with capital at 9.38% and total assets of $1.7 billion, up from $450 million in 1990.

He says San Antonio Federal's case illustrates the value of a good team.

"I didn't bring in a new leadership team but led a great team that was in place when I got here," he explains. "They just needed a focus, metrics for success, and someone to turn their considerable energy and talent in the right direction."

The little CU that could

What if your credit union doesn't have hundreds of millions of dollars in assets when it hits hard times? If you're already on a slippery slope, your situation might call for extraordinary measures of personal sacrifice and creativity. O.U.R. Federal Credit Union, Eugene, Ore., is one such case.

President/CEO Loretta Moesta and her husband joined O.U.R. Federal in the late 1980s after volunteering at the credit union's soup kitchen.

As the only community development credit union in Eugene, O.U.R. Federal struggled with the high costs of serving members of modest means.

A professional debt collector, Moesta offered her services in 1994 to help with loan delinquencies when the credit union was placed into conservatorship in the wake of a $650,000 embezzlement.

When NCUA examiners challenged Moesta's debt collecting techniques, she explained in no uncertain terms how and why her methods worked. She quickly gained their respect.

Soon Moesta was doing more to help. She quit her paying job to work full time at the credit union. Eventually, she took on the job of running O.U.R. Federal. That was when the real sacrifices began.

"The credit union was located in a house," she explains. "Upstairs was an unoccupied apartment that I used as an office. But we needed to do everything we could to keep the credit union afloat. So my husband and I moved into that space and paid rent."

Living upstairs only made it easier for Moesta to work day and night. And although inexperience was a problem, hard work and strong support from the Credit Union National Association's (CUNA) center for professional development (CPD) got her through.

CPD staff recognized Moesta's time and resource constraints. They helped her devise a workable assignment schedule and payment plan for the Volunteer Achievement Program and Staff Training and Recognition Program courses she was taking.

O.U.R. Federal recovered its losses and was released from conservatorship by 1997. Challenges continued. Moving the credit union to a better location for members in 1999 was costly. Donated computers had to be upgraded. Allowance for loan loss requirements were difficult to maintain.

But with a great team of volunteers and the help of federal grants, O.U.R. Federal just reached its fourth consecutive quarter at 7% net worth. In the past decade, assets increased 23%, to more than $3.8 million.

The credit union has a diverse membership, high service levels, and an award-winning bilingual financial literacy program.

The challenges will remain, says Moesta, but so will O.U.R. Federal. Of its 2,700 members, 82% earn less than the national median income. What will keep the credit union forging ahead to help these members?

"We have the volunteers everyone wishes they had," Moesta says, adding that "heart, attitude, desire, and a little bit of insanity keep us moving."

Growing into a problem

Oddly, growth can be a problem for smaller credit unions in a slow economy. Such was the predicament of Windward Community Federal Credit Union in Kailua, Hawaii, says President/CEO Donald Miles. In 2001, the credit union was challenged by steadily declining interest rates.

"With the declining rates and rapid asset growth, our capital ratio just couldn't keep up," Miles says.

The board and management did whatever they could, saving staff cuts for last, to keep the ratio above 6%-the trigger for NCUA action. They cut expenses and strategically lowered dividend rates. The dividend rate changes caused highcost certificate balances to decline and generally slowed savings growth.

"Essentially, we unloaded high-cost share certificates, replacing them with lower-cost regular shares," Miles says.

Windward Community Federal held on to its members, and asset growth slowed. They were out of the woods a year after NCUA intervened. Now the 9,600-member credit union's net worth is more than 8% with $42.5 million in assets, up 5% since 2001.

Again, a positive team effort-this time focused laser-like on long-range planning-saved a credit union and gave it a future.

Copyright Credit Union National Association, Inc. Feb 2005
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