Eleven Lessons (Learned the Hard Way) from a Sand State CU CEO

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As a troubled credit union in one of the "sand" states, I can safely say that the past two-and-a-half years have been rich with learning.

It is true what they say about adversity being a great teacher. I have watched our numbers deteriorate, observed the rumor mill's spin, watched regulators scramble to cope with their case overloads, and I decided it was time to share a few of the things we leaders of troubled credit unions have learned along the way.

We felt the effects of this recession first, you see. Our stories are all unique and our tipping points may be different, but our red ink is the common link. For the most part, sand state credit unions were progressive, market-focused, and well managed leading up to this crisis. Few people could have predicted the depth and impact of this recession. In my conversations with some of these CEOs, here are a few common themes:

One might say we are victims of geography. If you are running a credit union in one of the sand states, you probably experienced a huge mortgage market dislocation. As housing prices spiked out of control, exotic lending instruments and sub-prime loans became common. Once the re-pricing of those loans began, the defaults began. Collateral damage became common buzzwords for credit unions as we all began reeling from losses across all portfolios-real estate, auto, and credit cards.

As our loan losses exploded, we began to take stock of our business model. Turns out some of us ran operationally inefficient credit unions. These past three years have served as grim reminders that credit unions exist for our members' benefit. At USA Fed we were not exemplary stewards of our members' money. We got by with it for years because in a good economy it was easy to make money and build reserves. But in a bad economy our ugly sins were exposed and had to be addressed. We've all cut staff, closed branches, abandoned new markets, outsourced services, slashed programs and retooled our business models. I know of no troubled credit union that hasn't admitted that they should have been leaner.

Another area we'll revisit in the future is that of assessing appropriate risk-this may be credit risk or portfolio concentration risk. At USA Fed, we took no greater risks than other credit unions in our market, but we took those risks with less net worth at the outset. I've had to rethink my philosophy on what is the "right" level of net worth. I have always operated a "well capitalized" credit union, but focused on investing in technology, member service, new branches, etc. We didn't build high net worth-didn't see the need-we invested it in our future.

Other credit unions that began this recession with higher net worth have suffered similar losses, but are still alive and kicking and reaching out to serve members who desperately need a good credit union. A few of us, on the other hand, are fighting for our lives and living in a world of PCA and NWRP.

Bottom line here is that no amount of capital is enough when a financial tsunami hits. As a credit union industry, this is our Achilles heel. We cannot protect, preserve, or progress as an industry without gaining access to alternative capital sources. Those of us in the sand states have learned this one the hard way.

Do I think we're going to make it? Yes, I do. I'm bullish on USA Fed. I know we still have a tough year ahead of us, more losses, more net worth erosion. And system costs could still throw a monkey wrench in all our best laid plans. But I will fight as hard as I can to bring us back because our members, our employees, and my team expect and deserve no less. I am buoyed each day by my team's amazing strength, even a sense of adventure, as we learn and cope together. We have become our own band of brothers in this fight.

The Leadership Lessons Learned

And as for my own journey as a leader, I've gone from abject fear-fetal position, thumb-sucking paralytic fear-to the final reality that we cannot accomplish anything if fear rules the day. We are committed to the fight and extremely optimistic about our future. Here are some of the leadership lessons that I and some of my fellow troubled credit union CEOs have learned on this remarkable journey:

• Work your way through the classic grieving process as quickly as possible. You know the drill-fear, denial, blame, acceptance, and finally, action. Don't wallow in any phase except the last one.

• Take control of what you can. You can't predict the market or the ultimate outcome of all this, but you can reshape your balance sheet, cut costs, work with stressed borrowers to stay in their homes, beef up collections efforts, etc.

• Remain positive and focused, even if you're not feeling it in your gut at the moment. Fear does not solve anything. And staff can sense fear and uncertainty. It will defeat you if you let it.

• Get real. Whether dealing with your board, the NCUA, or your staff, you must be realistic and transparent about your situation. It's one thing to have a positive outlook, but don't be in denial about how tough things are. In Jim Collins' book Good to Great, there is a chapter called "The Stockdale Principle," which talks about the need to accept the grim reality of your situation. Only then can you move ahead.

• Formulate a plan of attack. Wringing your hands and vacillating does nothing to instill confidence. Put your best minds together, build the plan, and work it. If it's wrong, rework it and start again. Be pro-active whenever possible. If you're headed for PCA territory, start working on your NWRP plan early. Pay close attention to appropriate loan-loss reserves and make sure your coverage ratios are solid. We're still not out of the woods so no pipe dreams or rose-colored glasses, please.

• Make negativity your enemy. When your confidence begins to wane, negativity is like a cancer that begins to creep in and take over your mind and your will. And in a recession as horrible as this one has been, one can't read or listen to the news without feeling that the sky is falling. But take heart, Chicken Little, all recessions come to an end eventually.

• Become more hands-on. Trust but verify. You may have a great team, but these are unusual times and many of your people are experiencing situations that they've never seen or even read about before. Bring your people together often. Follow up with vigor and urgency on tactics. Make sure everyone knows their role is vital in solving these problems.

• If you are the type of leader that holes up in the office and crunches numbers or goes over spreadsheets, it's time to get out and walk around. Your staff knows more than you think. They need to see you and feel your positive energy. Open and constant communication will be more important than ever before.

• The board will be more engaged in the day-to-day operations. Deal with it. It's not meant to show distrust. It's simply a sign of the times. They want to help and they want to understand. Have frequent discussions about the losses, the efforts to address the losses, the loan-loss reserving formula, and anything else they want to talk about. Be there for your board and above all, don't be defensive or take things too personal. And one more thing-boards hate surprises. Enough said.

• Allow yourself to grow. That happens once you forget about your pride, your ego, and your reputation. Believe in yourself, your credit union and in the cooperative principles. Recognize that as true cooperatives, we'll start to heal when our members start to heal. Recognize that you will never be the same. You'll never lead the same. That's probably a good thing.

• Fight like Hell. Do not give up on your staff, your members or your credit union. And above all, believe in yourself and the role you must play as a leader to create the vision of the future that will cause people to rally and engage for the tough fight that still remains.

Mary Cunningham is CEO of USA FCU, San Diego.

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