Chip Filson
My colleague Bucky Sebastian sometimes describes a person as “Hard of Listening.”
This is his play on the words “hard of hearing.”
A person speaks about 225 words per minutes. But the mind can hear over 500 words per minute.
So when “listening” we dual task, shift attention, or think about our reply.
One observer commented: “No one ever listened his way out of a job.”
Whose voice did you miss today?
At a church luncheon I learned about Go Go Grandparent, a nationwide platform to provide more convenient access to Lyft/Uber rides for older persons.
The service focuses on serving older persons without cars and who prefer to use the telephone, not an app, to request ride services. The service would be similar to calling a taxi; however, it adds a set of information options so that repeat visits are as easy as pressing 1, 2, or 3 on the phone when prompted.
The cost of the service is 27 cents per minute plus the usual Lyft/Uber fee.
The reason for presenting this service at this luncheon, attended mostly by seniors, was to replace the ad hoc, erratic demand for ride pickups to church that had been the responsibility of the deacons. The church’s volunteers were not insured and the demand unpredictable.
The Church decided to “outsource” its service. In addition it had received a donation to pay all costs for the first year.
Go Go’s website does not identify attending church as one of the many examples for transportation that non car owning seniors might require. Rather it lists doctors’ visits, shopping and other errands that are part of older persons required away from home visits.
The church’s sponsorship and underwriting the first year, the use of existing ride services, the convenience of traditional telephone communications (versus an app) demonstrate how vital partnering is to the success of this startup’s business model.
For it would take much greater capital to sign up persons one at a time in the demographic the business is trying to reach. By creating an information data base of passenger destinations, Go Go helps users manage their own transportation rather than starting all over each time a ride is needed.
Two observations from this example. Is there an equivalent transportation need for a group of your senior members?
Secondly, Go Go is a national platform dependent on local services and organizations to market and complete each ride. Could such a solution be better managed locally? Go Go stores users’ destination data; it inspects drivers’ vehicle for special need passengers, and it claims to interview each driver for sensitivity to older person’s physical limitations.
Should credit unions be fostering these kinds business startups for their communities?
Most would answer “nothing.” The fee is just another way to grow non-interest revenue.
An article about Alpena Credit Union lowering its overdraft fee again, from $19.52 to $17.50, brought to mind a conversation I recently had with a CEO.
The discussion was how to explain a $35 fee for clearing a member’s check on an overdrawn account.
This amount would equal a half day’s (four hours) take home pay for a member earning at or near the minimum wage of $10 per hour in their community. The team needs more money to make budget. What choice do we have? The CEO responded, what kind of a co-op do we want to be?
He further asked whether the strategy was to grow income or member relationships?
The lack of clarity was further confused by the metrics the credit union tracked for acceptable performance. All of the ratios had to do with balance sheet financial outcomes: growth, ROA, expense ratios, productivity goals, etc. In other words, an examiner’s financial checklist.
Members were not the focus of any tactical criteria, except to get more of their business.
He then raised the topic of cooperative metrics. How are we tracking cooperative tactical success? What would these say about who we are and what our business evolution should look like?
His point of view was that to be true to ourselves, credit unions are supposed to enhance member well-being. Absent meaningful metrics, there can be no practical oversight or peer comparisons for what makes cooperatives different. The risk is that members will see credit unions as insincere, just another financial option with a gentler persona.
The right metrics are a choice for every credit union. In this case, is your credit union a $35 or $17.50 co-op? What would your member choose?
Almost twenty years ago, Callahans had a program of hiring five new college grads annually for the company’s future growth. There was a two week, full-time orientation to introduce the credit union movement and the company’s history before the new employees began a six month rotation among the firm’s operating units.
In the two-week introduction , we would invite a credit union CEO to speak about why they chose a career in credit unions and their vision for cooperatives.
A frequent guest was Jim Blaine, the now retired CEO of State Employees Credit Union in North Carolina. It was and is the 2nd largest credit union in the country.
Jim is a master story teller. He makes his points with directness. He seeks agreement as he goes along. He wants you to share his beliefs.
Even with all of his distinctive rhetorical skills, the one assertion that stands out for me from his presentations is:
“In America today, those that have the least, or know the least, pay the most for financial services.”
From this factual foundation, he would then describe his business tactics: the non-conforming variable mortgage with every member paying the same rate, no indirect auto loans, a simple savings account, no paid advertising, etc.
While one might debate the tactics, his observation still stands as a challenge for today’s cooperative executives: what are credit unions doing about this persistent market reality for America’s consumers?
In 1984 Ed Callahan delivered the customary NCUA Chairman’s speech to CUNA’s Governmental Affairs Conference.
His title this February was “Finish the Job.”
In the talk Ed outlined the incredible success of deregulation, credit union’s “fantastic” performance, and how the movement was fulfilling the founders’ visions for serving America.
He directly challenged critics who accused NCUA‘s policy initiatives as “competition in laxity.”
(https://www.youtube.com/watch?v=1UcXPyUMtic)
But there was one further institutional reform needed to ensure the industry’s future in the new market driven environment.
That change was to redesign the NCUSIF from an annual expense premium to a self-funding model based on 1% of insured deposits as the core.
As you hear Ed’s voice, note the former football coach’s style:
Ed never used a script. But his logic was so clear you could transcribe his words verbatim. While the circumstances Ed addressed have changed, his authenticity marked by directness, transparency and passion are needed all the more today.
Listen for the rouser at the end. It was his signature moment!
NCUA’s sale of 4,500 credit union members’ loans secured by taxi medallions to a private equity firm is a betrayal of everything the credit union cooperative system represents. Credit unions were founded to protect consumers from being exploited by loan sharks preying on those who have the least or know the least about financial services. NCUA’s sale just put these members and their families at the mercies of Marblegate Asset Management LLC, a firm that exemplifies capitalism’s limitless profit ambition.
These 4,500 borrowers have invested years, some decades, establishing an equity stake with the sweat of their brow, in an earning asset to help them realize the American dream of financial well-being. They joined credit unions and trusted their interests would be treated fairly. Instead the agency regulating the industry sold them out to add additional pieces of silver to a fund bulging with more than $16 billion in liquid assets.
This action irredeemably harms these members whose interests are exactly opposite Marblegate’s. NCUA’s fundamental responsibility is to protect credit union members. This sale places a stain on the entire credit union system. It contradicts Board members’ individually stated policy priorities to treat members fairly, to support financial inclusion, or follow the rule of law.
This deliberate action is an agency wide effort. There was no emergency dictating the disposal of these loans. Rather, NCUA planned for over a year to shed responsibility for the safety and well-being of the very persons credit unions were intended to serve: the member-borrower.
The agency says it worked on this effort for 18 months. When confronted earlier this year with widespread requests by New York City, Congressional and credit union leaders to work collaboratively with the 4,500 members affected, the agency claimed it had to act now or lose its credibility for future asset sales.
It put the buyer’s and its own self interests ahead of the members. Seldom has the well-being of the powerless few been so completely trampled by those with money and authority.
A 2019 New York Times investigation found 950 licensed taxi drivers have declared bankruptcy since 2016. The crushing debt has led to driver suicides. NCUA has now transferred the fate of these credit union borrowers to an investment fund whose reported plan is to acquire the largest share of New York’s 13,500 medallions.
NCUA provided no facts about this sale. Rather, the media has reported the only public details of this regulatory tragedy.
On February 20, the Wall Street Journal reported the sale to “an investment firm known for buying up distressed assets, will now become the largest single owner of New York City Taxi medallion loans” with this purchase.
The Journal reported the price of $350 million was for a portfolio of 3,000 New York medallions, 900 Chicago medallions, 500 Philadelphia medallions and 100 from other cities.
This is an average loan value of $77,800 each, all secured by medallions. The estimated par value of these loans is the purchase price of $350 million plus the loss NCUA says it has taken on the portfolio of $760 million. Combined, these two numbers add up to an average book value per loan of approximately $245 thousand.
This total par value of $1.11 billion also suggests that the average price per loan was approximately 31 cents on the dollar, or a discount of more than two thirds from the portfolio’s original book value.
We don’t know what proportion of these loans are receiving regular payments. But many are earning assets backed up with years of payment history. Some will have been rewritten. In every case the medallion security minimizes the possibility of any downside loss. For if the borrower defaults, the security has a cash price that can be monitored in each market.
For example, individuals are offering to buy New York medallions for prices from $125,000 to $135,000 on multiple websites today. The actual sales price for a Chicago medallion since January 1 has ranged from $24,000 to $40,000.
In Boston offers to buy on the web range from $27,000-$40,000.
The following news articles suggest that Marblegate is not interested in loan assets yielding 6% or, if bought at the estimated discount, a yield of 18-19%.
Marblegate Asset Management LLC formed in 2009, is an investment fund focused on buying distressed assets.
A Wall Street Journal article from April 11, 2011, describes Marblegate’s corporate strategy.
The following excerpts from the article describe how these funds try to make high returns, an effort foiled in this case by Lee Enterprises which had been the target of a takeover through purchase of the company’s debt by “vulture” funds. The tactic failed when Lee found alternate financing.
Newspaper chain Lee Enterprises Inc. is on the verge of saving itself from bankruptcy — and many of its debt holders are livid.
Lee, weighed down by about $1 billion of debt, has long been high on the list of potential bankruptcies. But thanks to the roaring market for debt of risky companies, Lee is preparing to sell junk bonds that would enable it to pay off its obligations and give it a new shot at survival.
But what is good news for the company has thwarted the plans of a flock of “vulture” investors — Monarch Alternative Capital, Alden Global Capital, Marblegate Asset Management and a unit of Goldman Sachs Group Inc. — which have been buying Lee’s loans. The group had been betting the company would default, and that they could turn their holdings into an ownership stake, giving them access to the company’s assets, which include St. Louis Post Dispatch and the Arizona Daily Star newspapers.
Instead, they will get repaid, but miss out on the chance to make even bigger profits as owners.
Lee isn’t alone in its sudden pullback from the brink of bankruptcy, thanks to the frothy state of the high-yield bond market. One by one, distressed companies have been able to sell debt as money floods into the debt markets.
That has left few money-making opportunities for distressed-debt investors, who engage in a type of financial schadenfreude: profiting from the misfortunes of others. Vulture investors typically buy debt at low prices, expecting to turn that debt into equity in the company, giving them ownership. Then they can sell off assets or run the company, making more money than they would by simply owning the debt. [emphasis added]
An October 15, 2018 Wall Street Journal article, “Hedge Fund Bets on the Taxi Business” reports Marblegate’s efforts to acquire a dominant share of the New York taxi medallion markets.
Vulture investors are circling the beleaguered New York City taxicab industry.
Hedge funds that specialize in distressed investing have been kicking the tires of the New York taxi market after prices for medallions plummeted amid competition from ride-hailing upstarts. Marblegate Asset Management LLC, a Greenwich, Conn., hedge-fund firm, decided to place a big bet, and over the past year or so has scooped up about 300 medallions for a total price of more than $50 million, according to people familiar with its strategy. (note this would be an average price of $167,000)
Owners of taxi medallions and their drivers in New York and other cities have been hobbled by the flood of app-based ride-hailing services such as those run by Uber Technologies Inc. and Lyft Inc. There are more than 80,000 vehicles used for ride-hailing services in New York City, more than triple the number in 2015, regulators say. They now dwarf the roughly 13,500 yellow cabs. The competition has led to declines in yellow-cab trips and fare revenue even as the number of passenger trips in for-hire vehicles has soared.
New York City this summer instituted a one-year freeze on licensing new for-hire vehicles while it examines ways to raise driver wages. (note: tis freeze has been extended)
Marblegate, which began buying up medallions last fall at prices between $175,000 and $200,000, isn’t trying to call a bottom, according to people familiar with its strategy. Instead, it plans to operate its own fleet of taxicabs and believes it can run a better business than existing operators — in part by improving working conditions and benefits for its drivers.
At current rates, owners can lease out a medallion to a fleet operator for $15,000 a year, people in the industry said. The operator takes care of cars, drivers and vehicle dispatching, meaning that a buyer of a $175,000 medallion can expect an annual return of 8% to 9%. The price of the medallion is also tax deductible over 15 years.
By operating its own fleet, Marblegate’s returns could be significantly higher. [emphasis added] Aleksey Medvedovskiy, chief executive of NYC Taxi Group, a fleet operator based in Brooklyn, said that some of the better owner-operators today earn about $30,000 annually per medallion, or a 17% return on a $175,000 investment.
Distressed investors buy assets in industries in which disruption has caused prices to decline, wagering they have fallen too far. Investors see New York as the city where traditional taxis — which have the exclusive right to pick up street hails in Manhattan — have the greatest chance of survival. One million passengers hop in a cab, a town car or an Uber each weekday across the city, according to regulators.
“As long as there’s a hail system and a central business district, there will always be business for them,” said Matthew Daus, a lawyer at Windels Marx Lane & Mittendorf LLP who specializes in the medallion industry.
In a July 18, 2019 Crain’s New York Business article, “Mystery Buyer Snaps up taxi medallions as prices fall further“, the state of the taxi medal market is described:
Taxi medallions might be worth less than ever. But in some ways, there has never been more interest in the troubled asset.
Private-equity firms have been circling for the past two years as prices have continued to fall. Marblegate Asset Management of Greenwich, Conn., is the furthest along, having acquired a little more than 300 medallions, starting with purchases at an auction in September 2017.
The firms have different strategies for how to profit from the medallions, according to insiders, but agree that taxis have a future as a key part of New York’s transportation infrastructure. Some see their interest as a bet on the industry’s eventual recovery.
“There are multiple players now—it’s not just Marblegate,” said Matthew Daus, a former Taxi and Limousine Commission member, who is a partner at Windels Marx, a law firm that represents taxi interests. “This is a positive sign.”
The article’s final observation about medallion sales values is also relevant to NCUA’s action: “Bulk sales typically fetch lower prices per placard than individual sales.”
Even at the discounted prices of the loans which would result in double digit yields, Marblegate’s strategy is to dominate the market for New York taxi medallions to enhance their profitability. Owning medallions is the firm’s operating goal, not administering borrowers’ loans. Refinancing to help individual borrowers pay down loans would just prolong the time before Marblegate might foreclose on a medallion due to driver’s payment defaults.
NCUA has turned these credit union members’ financial fate over to a fund whose sole goal is to maximize return on invested funds.
The New York Post directly addressed this issue. The story was published February 20,2020, the date of NCUA’s board meeting, titled Cabbies Worry as Hedge Fund Snaps Up Taxi Medallions:
Some industry sources said they were skeptical whether Marblegate would be interested in taking a haircut on the loans to help out taxi drivers. “Marblegate is happy owning these assets because they want to own a superfleet and build economies of scale,” according to one industry insider. “The idea is to keep buying the loans, keep foreclosing on them and keep gobbling up medallions until you control the market.”
How could any individual borrower ever hope to renegotiate loan terms with Marblegate? They want the medallion, not a loan, that if paid off would take away their prospect of owning the medallion via foreclosure.
A Credit Union Times story the same day quoted the Bhairav Desai, executive director of New York Taxi Workers Alliance that they hoped to restructure the loans at uniform value of $150,000 each. Instead NCUA sold the loans for $77,000 each. The borrowers received no benefit from this sale and are still burdened with debts incurred in very different market circumstances.
Marblegate acquires the debt at a very steep discount. The members are shut out from any upside potential from the sale.
NCUA has turned its back on common sense and its fiduciary obligations to the cooperative system.
NCUA has charged the cost of the resolution of liquidations to the credit union system but then given all the potential upside profits to the private sector to reap. Co-ops pay for all losses. For profit firms reap the gains.
There are no facts provided in the NCUA press release, the FAQs or board oral statements defending the sale. The rhetorical explanations are entirely unsubstantiated. There have been no criteria for the solicitation process, no details about the financial advisor’s purpose or recommendation, no comparison of different options, no data on administrative costs, and no information on portfolio performance provided to explain this decision.
Somehow the general press (Wall Street Journal, MSN and New York Post) were able to find these details. This fact vacuum suggests NCUA either does not have data to support the sale process or is afraid the data would not justify their action. Vague assertions and generalizations replace evidence.
The hollowness of NCUA’s arguments is staggering. McWatters is quoted: “We are fiduciaries for the insurance fund. We needed to take this offer.” Without a single fact to back up why a $16 billion fund needs more cash liquidity.
The most absurd statement in NCUA’s press release is “Private entities have specialized skills and greater resources and flexibility to work with borrowers in ways the NCUA cannot.” I will not argue with NCUA’s confessed lack of competence. But are they also ignorant of the billion-dollar credit unions and CUSO’s that manage taxi medallion loans as an everyday part of their business with specialists that know how to work with members?
NCUA has dissed the expertise, capabilities and experience of the credit unions they oversee in turning the future of these members to a “vulture” fund over which they have no control. They have sold out not just 4,500 members, but the entire cooperative system’s reputation and replaced it with a private, profit maximizing fund’s financial ambitions.
Compounding this demeaning assessment of credit union’s expertise, this bulk disposition of distressed assets will only harm credit unions with loans secured by the same collateral. The public fire sale which writes off two thirds of the book value of loans, can only harm the valuation of loans now held by credit unions in the same asset class.
As for NCUA’s claim that this was “the least long-term cost” every known fact about this case suggests just the opposite conclusion. The agency took the highest and greatest loss possible forgoing all future revenue from these loans. The upside opportunity is not tied to medallion values, but rather to the borrowers’ abilities to make affordable payments on their debts as they strive to achieve full medallion ownership.
At a fire sale average price of $77,000 (or the higher $150,000 amount proposed by the Workers’ Alliance), it is inconceivable that these experienced borrowers and taxi drivers could not meet rewritten payment terms and create a win-win for them and the NCUSIF.
The statement that “failure to achieve an orderly liquidation at the lowest long-term cost would violate the NCUA’s Congressionally mandated mission of protecting the insurance fund” is nonsensical. It is supported with no facts and in essence suggests that Marblegate doesn’t know what it is doing due to these so-called long-term costs. I suspect that this investment fund knows exactly what it is doing and has calculated that the long-term revenue returns that will enable it to dominate the taxi medallion business in New York and other cities. The statement merely confirms the agency’s analytical myopia.
When has NCUA ever justified an action by invoking a “Congressional mandate? If that is the reasoning whatever happened to the “Congressionally mandated mission” to help cooperative borrowers?
The sudden action (Feb. 19) by NCUA after numerous inquiries and efforts by the New York City Council and other interested parties suggests NCUA wanted to lock in the loss on these liquidations. Before the liquidation of the two credit unions, the NCUA-appointed conservators had estimated the combined negative net worth of LOMPTO and Melrose at $150 million at June 2018. In the September 2018 liquidation, NCUA recorded a $760 million expense against the allowance account.
This was an estimate already recorded in the December 2017 NCUSIF audit, over two years before this February 2020 sale. Any resolution that would contradict this prescient estimate would be embarrassing for all involved. So best to lock in the loss projected with amazing foresight so there is no need to explain how a $150 million deficit balloons to $750 million three months later.
And the $350 million just happens to be the net recovery value NCUA estimated when they expensed the allowance account over two years earlier. It is indeed remarkable how accurate this loss forecast proved to be compared to the absence of any contemporary data to support the sale today.
Following the NCUA meeting on Feb. 20 in which the taxi drivers’ signs were taken away and many routed away from the board room, one taxi representative summarized the board’s actions: “They sold us out today.”
The day following the Board meeting the New York state attorney general ordered the city to pay $810 million to debt-hit taxi drivers. The demand stated that the city allowed brokers and top players to collude on prices. The demand claimed the Taxi Limousine Commission marketed the new medallions as a path to the American dream.
Some commentators question whether this demand has any merit, but it shows two things. The possibility of assistance for taxi borrowers from unexpected sources. More importantly for NCUA, it demonstrates a government entity willing to try to help the borrowers, not walk away as NCUA has done.
NCUA’s explanations of the sale are neither credible nor convincing. The entire process was done in secret. Those most affected were never consulted.
This event raises the prospect that NCUA has become the weakest link in the cooperative network. For if members cannot rely on NCUA to protect their interests in this relatively small, highly visible event, what confidence should the 100 million plus members have that their interests will be safeguarded in the future?
This event is not an individual failure in which an examiner or survivor made a mistake or showed poor judgment. Rather this is an institutional failing from top to bottom over an extended period.
And that is why this betrayal has significance for every person concerned for the future of the cooperative system. To be silent is to give consent. Leadership tales courage. Shouldn’t Congress ask how this sale of members’ future fulfills NCUA’s cooperative mission?
Recently I posted two blogs that lifted stories Jeff Farver, a former credit union CEO turnaround artist, wrote for his family and friends about his career.
In three multi-year workouts, two as CEO, he saved these credit unions from liquidation. He did so in partnership with the NCUA who recognized his talents and innovative approach to resolutions. For example, his Good CU and Bad CU distinction and his ability to fashion a long term plan.
Credit union difficulties in New York City are continuing front page news.
At the end of his short history, Jeff added this paragraph:
One of my regrets in retirement is the loss of fellowship with my fellow Credit union CEO’s, but especially those who were problem solvers, risk takers and cooperative adventurers. As I reflect on my career, I must acknowledge how those past successes have led to my positive outlook on the future and self-esteem and contentment.
Today NCUA and state regulators struggle with how to resolve problem situations. The instinct is to want them to go away. Merge them so someone else with excess capital can figure out what to do. Or in harder cases, just spend money to make the problem disappear—the most expensive and destructive option of all. Moreover, members don’t vanish when a credit union is liquidated, as we see in the example of NCUA’s mishandled taxi medallion liquidations.
Jeff knew that turnarounds were not a math problem to achieve the right net worth result. Competent leadership was the key. Like life itself, effective management takes multiple paths for success and flexibility for changing circumstances.
Jeff was not the only workout road warrior for the cooperative system. Other names that come to mind then and today include: Jim Ray (now deceased), Gordon Dames (former NCUA examiner), Don McKinnon, Bill Connors, Andy Hunter, John Tippets and Steve Winninger.
And it was not just RD John Ruffin but a whole class of NCUA Regional Directors who became partners with credit union workout leaders. These senior NCUA managers encouraged turnarounds not simply ending charters. Dozens of CEOs also persevered often in the face of irrational NCUA demands to downsize. They resisted the demand to shrink until the remaining capital was sufficient to meet a net worth ratio goal, but maybe not sustainable for the long term.
The key success factor in resolving the inevitable problems credit unions will encounter is wise leadership. When this wisdom is lacking, replaced by panic or fear for one’s reputation, then responding effectively to problems is literally short-changed. Every NCUA response becomes a nail to be hit with a hammer, until it disappears into the wood.
Jeff characterizes the qualities needed “problem solvers, risk takers and cooperative adventurers.” He laments their absence. He modeled these necessary capabilities. That is leaders informed by the lessons of the past and the ambition for resolving credit union challenges with sustainable solutions.
Thank you, Jeff, for your life of cooperative service. Hopefully your example will inspire others to emulate your venturing spirit.
Today the NCUA announced the agency’s sale of over 4,500 credit union borrowers and their loans secured by taxi medallions. These loans, many from years of labor, represent the most important earning asset in these members’ lives. The purchaser was a financia hedge fund which specializes in buying distressed assets at fire sale prices.
There will be time to describe how morally corrupt this action is. This action by the agency supposed to protect members would seem right at place in a Dickens novel about debtors’ prisons. Or more apropos to the pre-credit union era when consumers’ primary source of credit was loan sharks.
But for the moment, a reflection from Proverbs 24:
If you faint in the day of adversity, your strength being small;
If you hold back from rescuing those taken away to death,
Those who go staggering to the slaughter;
If you say, “Look, we did not know this”—
Does not he who weighs the heart perceive it?
Does not he who keeps watch over your soul know it?
And will he not repay all according to their deeds?
Part I ended with the investment manager who engineered the workout at Eglin having to find a new job. (link to Part I)
I am skipping his next workout story to go to the biggest, most difficult challenge: saving a large troubled, insolvent credit union when economic times were relatively stable.
In early 1990, John Ruffin and Henry Garcia came back into my life by requesting me to interview for the CEO position of San Antonio FCU. John was the NCUA Austin Regional Director and Henry was his Senior Special Actions Officer. This time I asked for three years of Annual Statements of condition and yearly income and expense.
Those financials did not show the TRUE numbers for SAFCU. However, my EGO was tempted to take on another work-out if the rewards were worth it. But I loved living in Chattanooga and my family also loved it. The only concern I had was the private school cost to educate my three children and the future cost of sending them to college.
I turned down Henry G. at least two times and then he told me John Ruffin was in three days going to drive from Atlanta, where he was visiting family, to Chattanooga to interview me. My prep work was to find out what large CU’s CEOs were on average being paid and I found that the top 10% average was $200,000 a year.
So, when John arrived and made his pitch, I was prepared to ask for three things.
John agreed to my requests and I reported to duty July 25th, 1990. It took my first 90 days to identify how bad the pain and the problem really was.
I found $110 million of commercial loans, the worst of the worst, after NCUA’s ALMC purchased at par $75 million. Then we began getting appraisals and to the best of our ability to establish what the allowance for loan losses (ALL) funding should really be. After the completion of this process we determined that SAFCU was $36 million insolvent after funding of the ALL.
The commercial portfolio was the disaster, but I found a jewel in beginnings of a robust indirect lending program that would allow me and my team to grow quality earning assets with short durations.
Working with the Austin Region we began crafting a letter of understanding and agreement (LUA) that included the ability to earn out (retain) $25 million in NCUA capital notes. I can’t recall the thresholds to fund the capital notes but within 18 months we were fully funded and had removed the negative equity.
I noted that in a workout the CU staff always expects the worst to happen. In fact, six months before I was hired, the previous CEO had eliminated and fired over 100 SAFCU staff members. It would take time for the economy, Texas oil prices, and local real estate values to recover for SAFCU to liquidate at a reasonable price the commercial loans and the collateral we had repossessed securing them.
My workout tactic was to take the CU’s financial statements and income and expense and create a Good Cu and a Bad CU financial statements. By doing this I could show progress to my CU staff as well as NCUA Regional and Washington Staffs.
I then challenged my Indirect Lending staffs to increase loan production by an annual 20% increase for the first year and 30% year two and finally by year three, doubling our annual indirect vehicle loan production.
The tactic I used for working out the commercial loans and repossessed real estate was managed by this guidance: “Reduce the commercial loans and repossessed collateral as fast as possible with the least loss.”
I said “No” to sales where the price was extremely low, and I waited for an improving market. Likewise, we saw appraisals per square foot costs were lower than the costs of new construction were per square foot. Simply said, someone wanting office space could buy it cheaper than building it new.
The preceding were the core tactics to encourage the turn around. Add to them hiring freezes, cooperative ventures to share costs, zero based budgeting and extreme cost cutting while not cutting service to members.
Did it work? Well I earned my first capital improvement bonus in 1993; the second capital Improvement bonus in 1994 and the third and final bonus in 1996.
When I retired at the end of 2011, SAFCU’s Capital was $254 million and the total assets $2.9 Billion.
The financial turn arounds success, while great for me, also impacted others. The continuance of the financial health of these credit union meant that their members could be served and provided fair priced and valued financial services If the three credit unions had been liquidated during the time that S&L’s were being closed, I estimate that the losses to the NCUA Share Insurance fund would have been close to $250 million.
My greatest career satisfaction was mentoring nine future credit union CEO’s. Two or three of them after a stint in dealing with Board members switched to other career paths. Also, as of the as of December 2019, four of my mentees have retired, and three are active Credit Union CEO’s.
Footnote: Today San Antonio FCU is renamed Credit Human. It serves 233,110 members with 787 full time equivalent employees, in 20 branches and managing $3.2 billion in assets. The net worth ratio is 11.1%
