BIRMINGHAM, Ala. — The reasons behind Mutual Savings CU's dramatic one-year turnaround-going from a $5.8-million loss in 2009 to a $724,000 profit last year-face Doug Key every day.
In the CEO's office are two large easels that tell the story of the credit union's comeback from conservatorship, listing all of the key goals to reverse MSCU's fortunes and the progress in getting there. They show that MSCU has reduced assets to help lift capital from a low of 5.39% to 6.6% today, tightened lending standards and cleaned up many bad loans, toughened the collections process, improved operational efficiency, and changed the culture of the credit union.
Key insisted that kind of daily focus, with objectives tracked in the open for everyone to see, was needed to address heavy delinquencies, an expense-to-income ratio at 6.04% in June 2009, and more than $5 million in business loans gone bad — all of which led the Alabama regulator to conserve the $172 — million credit union on July 31, 2009. Mutual Savings was released from conservatorship July 31, 2010.
"Having those easels right in front of us every day are a reminder of where we have been and where we are going," said Key, a Birmingham lawyer who was brought in to turn the credit union around after the former board and CEO were dismissed. "Some might say the easels are symbolism and silly. But not to us; they have worked."
Checking Off Objectives
The approach helped MSCU stay the course and check off objectives as it reached them. High on the list was improving operational efficiency. "I could tell by looking at some of the expenses we could turn this issue around fairly quickly," Key told Credit Union Journal.
Operating expenses to average assets, while still high today, were reduced significantly to 4.99% by December 2010. The credit union closed three unprofitable branches, reduced head count through attrition and layoffs to cut a 90-person staff by 20, and restructured employee benefits. "Those were some of the immediate changes," Key said.
Key explained MSCU partnered with vendors to renegotiate contracts to lower prices and eliminated some high-priced agreements, including management of a fleet of ATMs. "We determined there were a number of things we could do without," Key said. Cancelling the ATM contract for locations in department and convenient stores saved $140,000 a year.
Still, some very hard decisions also had to be made, acknowledged Key, who said the credit union was not shy about asking for assistance. "We told people we were in financial difficulty and needed help. Many were gracious and let us out of contracts," said Key.
MSCU stopped sponsoring some local community organizations and festivals to save $60,000 annually. It also cut a run of TV commercials to pocket another $30,000. Employees, too, played an important role, added Key, coming up with their own cost-cutting suggestions.
The credit union reduced non-interest expense by 20% in 2010, chopping off more than $2 million, ultimately helping to improve ROA. MSCU went from a negative 3.20% ROA in September 2009 post-assessment, to 41 basis points in December 2010 after NCUA charges.
Stricter On Collections
A much stricter collections policy, including more frequent calls and a tougher tone, has the credit union improving loan delinquency, Key contended. "We have become more hard-nosed in dealing with delinquent members. The credit union used to be more lenient in this area, but members are getting to know that we will be after them for payment."
Charge-offs dropped by $5 million in 2010 over 2009. However, delinquent loans, as a percentage of total assets, increased from 3.25% in June of 2009 to 3.91% in December 2010. "In total dollars, delinquencies have gone down," said Kendall Speed, EVP/CFO. Speed explained that the credit union has been shrinking itself, reducing total assets and putting the brakes on lending-including stopping business lending-which has increased the delinquency ratio. Call Report data shows MSCU's total delinquent loans unchanged from 2009 to 2010, hovering near $4.6 million.
Total loans as of December 2009 stood at $141.7 million, compared with $121.8 million in December 2010. But at the same time, shares have been reduced from $142.1 million in December of '09, to $132.8 million last December. The CU reduced assets by $20 million in a year-and-a-half.
Delinquencies were concentrated among a small group of local commercial loans with high balances. "We got caught in the same real estate bubble that got so many others," Key stated, saying the loans were for land and prospective housing developments for builders that later ran into financial difficulty.
MSCU has been able to work through some of the bad business loans but eventually wrote off over $5 million of the business. The credit union's 8.1% capital ratio at June 2009 allowed it to absorb the losses without dropping too dangerously low in reserves. "If we didn't have that capital cushion, it could have been a different story," Key said. "We still have some loan issues today, but they are not quite as bad."
Reducing Deposits
Conserving a credit union with over 8% capital may seem to some a hasty action, offered Key, who acknowledged that the state regulator was largely concerned about the business loans and high operating expense ratio.
Mutual Savings ran deposits out the door by cutting CD rates (.90 APY for one year, 1.15% for two, and 1.40% for three at press time). A lot of the hot money left while the credit union made exceptions for "core members" when they asked the credit union to match local rates, and it boosted loan rates. "We lowered our cost of funds as much as we could," Speed said. "By the end of 2010 we were at 1.72%, down from 2% in December of 2009. We have not been able to drop that figure as much as we would like, because we have a large amount of borrowing from the Home Loan Bank."
Key added, "We started reducing the bottom line, the asset and liability lines, and by doing that it helped us get control of the expenses."
Members, some of whom navigated MSCU's previous conservatorship in the 1980s, did not panic when they learned of the state's decision in 2009, according to Key, who credits changing the credit union's internal culture to focus on teamwork. Beefing up employee communications through blogs and biweekly staff meetings, the CU emphasized to employees that the credit union was stable, but it needed everyone's help. "I told my VP staff that we would either work together and save this credit union, or we would work separately somewhere else, all with new jobs," Key said. "Everyone pulled together, knowing we had to make cuts and sacrifices."
Internally MSCU referred to itself as Team Mutual and the Phoenix — "rising to new success." Boosting employee morale in turn raised member confidence, Key said. "Our front-line staff did a whale of a sales job on our membership. There was very little member unrest."
Key reminded that the CU is not yet clear of its problems and is in the final stages of a net worth restoration plan. Capital is expected to climb above 7% by year's end. Key's greatest concern is around problem loans still on the books, with a large number of interest-only second mortgages.
One Pleasant Surprise
"We were very concerned because we had $17-$18 million in interest-only second mortgages. So we looked at our credit scores on that business and saw they were typically high, and that has eased our worries a bit. Then we did a pooling of all the assessed values on these homes to see if we were under water, and we were pleasantly surprised to learn we have few problems there."
Key expects the easels will be standing in his office for a while, but is confident they will be removed soon enough, thanks to the efforts of employees. "It all starts with the team," Key said. "We have solved a lot of problems very quickly and that's due to the chemistry here. We work together very well, and that's what turned this credit union around."
