TAMPA, Fla.-What the Great Recession had in store for Tom Dorety and Suncoast Schools FCU is something no credit union CEO could have prepared for.
Unemployment in Florida skyrocketed from 3.6% in 2006 to more than 12% by 2010, and home values fell by at least 50%, dragging down local economies and SSFCU along with them. A perennial high-performing credit union that was growing assets by about 15% every year, in 2008 Suncoast began a three year-year streak of losses totaling more than $183 million.
Today Suncoast's situation has turned around, with the $4.9-billion credit union posting $21.4 million in net income in 2011 after assessments, and it is projecting solid numbers in 2012, as well. But the steps the credit union has had to implement to reverse the slide have not been the kind that are listed as bullet points in a plan stuffed away on a shelf somewhere.
Instead, the strategies were devised by Dorety and his team as they guided the credit union through the challenging times.
"We had never gone through anything close to what we experienced in 2008 through 2010," said Dorety, who came to Suncoast 24 years ago. "Since I had been here we never really even encountered bumps in the road. We were always ranked in the top two to three credit unions in Callahan's Return of the Member rankings."
Indeed, in the three years leading up to the recession, Suncoast averaged about $55 million in net income annually.
Stressing that Suncoast's situation was not any worse than many other credit unions' in economically troubled areas of the country, Dorety said many of the markets the CU serves, especially those in and around Ft. Myers, were at the "epicenter" of the state's problems. "There were financial institutions closing branches all around us. Lehigh Acres, Cape Coral, those areas were really suffering. Closing branches does not do much to help the community, both in a real and psychological sense. So one thing we wanted to do through all of the mess was keep going as best as we could in all of our markets."
Three-Year Process of Change
To do that it took a three-year process in which the credit union made sweeping changes-adjusting its staffing model, reconfiguring operations, and making changes in its approaches to lending, deposit pricing, collections and communications with employees. What Dorety is most proud of is that the credit union didn't close any of its 50 branches or run off a lot of members in a move to rapidly shrink in order to keep the capital ratio up.
Instead, its net worth restoration plan included allowing capital to decline slightly below 6%, which it did in 2010, far from its 8.78% net worth in 2006. Net worth today is 6.5%. "We could have stayed well above 6%," said Dorety. "But that would not have served our communities. We have shrunk our assets by about $1 billion. But we have done that in an orderly manner. We have been the best financial institution in our markets for so long, we did not want to act like we were deserting our members."
The plan to shrink assets called for changing Suncoast's pricing strategy of being 25 to 50 basis points above the local market on deposits. Dorety said that rate reductions began slowly in 2008 and dropped at their lowest point to just slightly below market average. Today the credit union's rates are increasing. "You can't drop rates all at once because you risk your reputation if you do that."
Dorety said the rate reductions were not terribly painful for the credit union or its members. "It worked to our advantage because we were able to reduce our cost of funds ($213.6 million in 2007 compared with $55.5 million in 2011) and increase our spread, and at the same time be at the market average on deposit rates. So deposits did not roll off a cliff and out the door."
Rates were not the only thing reduced at Suncoast; through attrition staff has been pared back by 15% since 2007, totaling 950 today. At the same time the employee count was getting smaller, large numbers of the remaining workers were being reassigned or trained to do multiple CU jobs. The credit union, said Dorety, sought to redeploy personnel resources into areas that would best help the turnaround. Departments such as lending had staff re-assigned, while collections and delinquencies got most of the attention.
Tellers As Call Center Workers
In some of the toughest economic areas of Florida, branches that were idle for long periods during each day had front-line staff performing call center duties during slow times. "We made a deal early on that if we were not going to close a branch we had to make sure the branch was contributing," Dorety said. "We learned to be as efficient as possible."
To lower operating expenses further, staff salaries and other compensation were cut by an average of 20%. "The higher you were in management the higher percentage in salary cut you took," said Dorety. "It made it a lot easier to stand up in front of people throughout the turnaround and talk about what was going to happen. Employees knew we all were in this together."
With an operating expense ratio at 1.8% before the recession, Dorety admitted cutting expenses further was not easy. He said inroads were made working with vendors to reduce current contracts, choose less expensive providers, or do without some outside services.
"We cut back on travel, of course, and other things like that. You do everything you can."
Yet what may have made the biggest impact on not only lowering operating costs but improving business results, reflected Dorety, is spending money and resources only on the things the credit union needed the most to pull itself out of its problems. "You look at developing technologies that will improve your processes and efficiencies rather than creating new products. We focused on technology to make us more efficient and better at the things we really needed to do."
For example, a significant amount of internal development resources were focused on collections reporting and analysis. "We had to do a better job of measuring risk (for default) and identifying those areas we first wanted to go after," said Dorety.
One important piece of analysis revealed by the new reporting was the need for Suncoast to move away from its policy of treating all members equally, and assign greater risk-whether from a collections or lending perspective-to those residing in more troubled regions of the state. Dorety explained that Suncoast serves two distinct regions, and the new analytics really brought to SSFCU's attention that the Fort Myers region presented a great deal more risk to the credit union.
Creating A New Department
Trying to get ahead of delinquencies, Suncoast created the Member Solutions Department and staffed it with 15 employees. For any member who showed signs of delinquency problems, the team became a primary contact point. "This group worked closely with members to help them manage their finances and find ways to help them work their way out of trouble. We decided to treat the member not the individual loan."
The Member Solutions Department is part of the lending team, not collections. "We want the mindset of the team to be helping the members first. These people are lending experts who figure out ways to help members who are having problems with their loans."
The stronger collections and delinquency efforts helped reduce the number of problem loans in the pipeline. Delinquent loans are trending down (4.53% in 2011 compared with 5.02% in 2009), as are charge- offs (3.05% in 2011 compared with 3.15% in 2009).
Partnering with multiple law firms, and the CU taking the time to understand in detail bankruptcy and foreclosure laws, prevented Suncoast from facing a huge backlog of foreclosures, a problem with many financial institutions in the state, said Dorety.
"We got much more attentive to every conceivable bankruptcy and foreclosure. We did not do any of the robo-signings on foreclosures, so we didn't encounter a problem with lawsuits and therefore never had to stop our foreclosures. Our foreclosure pipeline has decreased dramatically from where it once was."
Allowance for loan losses dropped to $170.7 million in 2011 from a height of $185 million in 2010. The spread between the reserves and actual loan loss provisions has increased significantly, with the difference being more than $69 million last year, another sign the credit union is getting a better handle on problem loans.
A Florida economy that has stabilized somewhat has contributed to loan data trending positive, said Dorety, who summed up what's happing with Suncoast's lending improvement: the credit union in the last three years has improved its management of troubled borrowers, and then has gradually made more-and better-loans. Negative loan growth, at its peak in 2010 (-8.35%) fell in 2011 (-5.85%). Dorety said it took a change in Suncoast's lending policies to get moving in the right direction.
"From all the problems of the last three or four years we have gained a much better understanding of how to work with members who are struggling," explained Dorety. "Plus we have gained more confidence in members, many of whom have held onto their jobs during the recession, and local property values have stabilized a bit. As a result we reevaluated our lending policy to reach deeper into the credit pool to try to make deals."
Reaching Out A Bit Further
Changing lending policies wasn't a simple decision, said Dorety. When the economic problems first hit the credit union tightened up underwriting. "You are scared to death to make loans. But maybe 12 to 18 months ago, we gained a little more confidence in the economy. We began reaching out a little further and then a little further into the lending market. We got more comfortable with what we were seeing and kept doing that."
Extending credit to more members isn't centered on credit score as much as it is the member, insisted Dorety, a bit of a throwback to the old credit union standard of "character." "It was not necessarily reaching to deeper credit scores. We are making the decision based on the individual more than we have in the past. It's more like lending we did ten to 15 years ago."
Suncoast has instituted a number of policy and process changes that have the credit union back on track. However Dorety pointed out the CU could not have turned things around without employees embracing the changes and challenges. "The last three years were a very difficult time for every staff member in this credit union. It was hard to come to work every day when you see all of the foreclosed homes and bank branches shutting down. Our employees were scared."
Not only did the right attitudes help with staff productivity and efficiency, positive outlooks helped maintain member confidence. Dorety believes increasing communications to the teams, many directly from the CEO, telling staff exactly what was happening all along the way kept employee confidence up.
A lot of the communications were focused on educating employees on what the credit union was going through. "We taught our team a lot more about finances than they ever wanted to know," said Dorety. "We helped them understand what net worth is so when they read news stories about the credit union they understood what was going on."
Following a year in which Suncoast got back on the correct side of the balance sheet, the morale at Suncoast is even better today. "Our confidence is higher, and everyone's step is a little lighter," said Dorety. "We are not celebrating, but we have a lot more positive things to work on now. It's a little more fun to come to work."
