Category: Observations

From the St. Anne’s Credit Union website: 

Founded in 1936 and headquartered in Fall River, MA, St. Anne’s Credit Union has been providing financial products and services to SouthCoast communities for over 80 years.

St. Anne’s Credit Union was established in the midst of a depression, by a young man named William J. Cyr who saw the possibilities – people helping each other regain their financial health. With the assistance of a group of friends, Cyr began collecting 25 cents from several people after church each Sunday to accumulate enough funds to qualify for a federal charter. With assets totaling $1016, St. Anne’s became a fully sanctioned federal credit union in 1936. Realizing the positive impact this had on the community, Cyr went on to found 36 more credit unions throughout New England. [emphasis added]

 The further you look back, the longer you can look ahead.

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.

A Community Service Business Model

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.

A Partnership Model

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.

Credit Union Implications

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?

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In North Carolina-Daffodils

In Bethesda, Maryland-Scottish Heather

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“History is not the past. History is the present. We carry our history with us.” -James Baldwin

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.

The Challenge: In his Own Words

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.

• First, If I accepted John and the Regional Office staff would become my and my team’s partners in this SAFCU turnaround.
• Second, in this high-risk challenge I wanted to be paid equal to the top 10% CU CEO’s average annual compensation of $200,000.
• Third, I wanted some “bonus” opportunities if I was successful. I asked if negative equity was improved to zero or positive, I would want a bonus of 1 year’s compensation. If total Capital equaled 4% of risk assets, I wanted a bonus of 1 year’s compensation. Finally, when total capital equaled 6% of total assets, I wanted a bonus of 1 year’s compensation.

John agreed to my requests and I reported to duty July 25^th, 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.

His Appraisal

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%

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“History is not the past. History is the present. We carry our history with us.” -James Baldwin

From 1978 through 1982, the US economy went through a financial wringer.

The precipitating event was the rise in oil prices that threw all 20th century assumptions about financial markets into doubt.

Double digit inflation and interest rates arrived at the end of the decade. They were the components of Reagan’s misery index which he used in the 1980 campaign to characterize the incumbent President Jimmy Carter’s economic results.

The Impact on Credit Unions

Credit unions were struggling mightily in this unprecedented interest rate environment. Most states and federal credit unions had a 12% usury loan ceiling in the law. Likewise, FCUs and most state charters were limited by regulation as to the rates they could pay on savings. These limits were based on long standing market assumptions that were being upended.

The balance sheet management problems were acute. Member savings were flowing out the door to money market mutual funds which passed to consumers the rising market rates. As rates soared to double digits, mutual funds and other securities such as Treasuries which paid these unprecedented rates, were draining {disintermediating} the accounts of insured depository institutions.

The cooperative systems liquidity safety net, the CLF had just been passed by congress but was still in formation. Credit unions were not eligible to join either the Fed or the FHLB systems. The Corporate network was still coming together and did not yet have a strong point of focus subsequently brought by US Central.

Moreover, both loans and savings accounts at credit unions were much simpler than several decades later. Savings were in a regular (passbook) account or short-term CDs. No share drafts. Most loans were short term unsecured personal or auto borrowings.

But the most pressing problem was that a number of large credit union balance sheets were loaded down with long term, fixed rate securities, primarily GNMA 8’s. These were mortgage backed investments offered at 8%, a yield no one ever expected rates on short term savings to exceed. The spread seemed locked in. Yet in the late 1970s overnight rates were in double digits. All fixed income securities market values were under water, and there seemed to be no way out of the interest rate (income) squeeze and the liquidity challenge, except failure.

Into this economic maelstrom stepped a 32-year-old, former First Lt in the US Army who left in 1970. His first civilian experience was managing an investment portfolio and retail branch for an S&L during this time of rising rates from 1973-1978.

His First Turnaround of the 5^th largest FCU-In his words

In December 1978, a lawyer friend asked me if I would apply and interview for Eglin FCU’s (EFCU) Investment Director. At the time EFCU was the largest financial institution in Fort Walton Beach.

What closed the deal is when FCU’s GM offered me $24,000 a year which was $2,000 more than I was making. However, I did not do any due diligence on the financials and or problems that led to the firing of the former CEO. Further, three years earlier they had built a four-story office tower, 100,000 sq. ft., with inland waterway access and a view of the Gulf of Mexico. Finally, in my former job as a banker we had to compete with EFCU’s 6% annual share dividend.

When I got to EFCU (age 32) I found that the $150 million asset CU, had $40 million borrowing as reverse repo using $50 million of Federal Agency MBS investments as collateral. $90 million of total loans and under $5 million of daily liquidity. The real liquidity kicker was EFCU had $100 million of unfunded future forward contracts to purchase GNMA’s or FNMA’s MBS.

As of January 1979, the market loss on the funded portfolio was approximately $10 million and the loss on the forward contracts were an additional $20 million. Note the mark to market pricing in January averaged 20% principal loss but by July 1979 this had increased to 35% of the par value.

July 1979 NCUA comes in and removes the General Manager and tells the Assistant General Manager that he had until year end to find another job. One month later, EFCU with the agreement of the Atlanta Regional Director hires an Alabama League Staffer, Jim Appleton. He and I then begin the back and forth with the Special Actions Examiner called John Ruffin (who later became an NCUA Regional Director).

In those days it was common that step one was to lower the share dividend, step two was to liquidate the “bad/underwater” assets. However, NCUA did not have any experience in dealing with liquidating long-term assets which had declined in value in a rising interest rate scenario.

The GM and I went to Washington and we pitched a unique Letter of Understanding and Agreement. Instead of selling out at the moment with the losses locked in, I crafted a workout plan. We would take the total of MBS on EFCU’s books plus the total of unfunded forward MBS and divided it by 30 months. That amount was the “required’ MBS sales per month. If market values declined 1% or more, we were required to sell 1.5 times the required sell. If market values rose 1% or more, we were allowed to sell ½ of the required sales.

With luck and favorable markets, I was able to liquidate all of the on-book investments plus the forward MBS contract and pay off the debt of the reverse repos by November 1980. Note we took capital losses but EFCU never went insolvent. Given the EFCU was the 5^th largest FCU and one of the worst financially troubled NCUA insured CU; I had solved their investment and borrowing problem.

The Reward

Then I had an unexpected surprise, the General Manager told me since we no longer had any investments, he no longer needed my services but there was a Credit Union in Tennessee that was looking for a new GM.

But that is for another blog.

Footnote: At December 31, 2019 Eglin FCU served 121,309 members with 347 “full time equivalent” employees, $2.05 billion in assets and a net worth ratio of 12.3%.

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These words are hand written on placards at a public demonstration. They are carried by children concerned about the future of the planet. Children crying out for our attention to confront the growing environmental crisis.

When our first child was born, I promised my wife that I would share the nighttime feeding duties. Every morning I would wake up and she would ask, didn’t you hear Lara crying? I had slept soundly; it was her mother who responded to the crying and got up. An event I seemed incapable of hearing.

Today children are crying out to the adults in the room about the most urgent crisis they perceive in their young lives. They are not encumbered by comfort and fruits of success. They bring a future perspective not clouded by present accomplishments.

They have become the salt of the earth and a light for many adults “in the room” but will we hear their call?

P.s. Have you ever wondered what your “carbon footprint” is?

In response to my blog “What is the Value of a Member Account“, one reader sent:

“Thought you might be interested . . . this is a bank purchase a few years ago; $1200 per customer!”