Space Coast Credit Union ($3.1B, Melbourne, FL) is a community credit union that serves nearly 240,000 members in more than a dozen counties across Florida. Here, CEO Doug Samuels discusses the strategy Space Coast employed to turnaround its falling capital ratio after the credit union’s 2009 merger with Eastern Financial Credit Union.
What were the advantages of the merger with Eastern Financial Credit Union?
Doug Samuels:Space Coast had been concerned about the space program shrinking since the early ’90s. Brevard County, where the credit union has been for 60 years, is a smaller county that relies on a few large employers. In 1993 our board set forth a strategic initiative to expand beyond that county to reduce the reliance on a single community. We were concerned about concentration, and after several hurricanes hit us in 2004 we realized the credit union had significant risks in such a concentrated area. This made the credit union open to an expansion.
Eastern Financial was almost a mirror image of Space Coast. We were in Central Florida and Eastern was in South Florida. Both credit unions had 32 branches and roughly the same number of members and assets. Building an additional 32 branches and growing 150,000 members was not something Space Coast could easily duplicate, which made the merger attractive.
Did you have any reservations about taking over the troubled institution?
DS: Absolutely. We had our own mortgage issues to deal with. Home values had dropped 60% to 70%. The economy was a big variable. Eastern had a large commercial loan portfolio that was subject to economic issues. If unemployment continued to increase and small businesses continued to struggle, we would have challenges.
The big question everyone had was “can we pull it off?” Eastern was a little larger than we were. It had a great deal of trouble and a different operating area down in Miami. There were concerns as to whether merging would create a larger, troubled credit union. We had enough time to assess things but wondered if we fully understood all the problems. We had to take a long-term view and decide whether this fit into our business model and ultimately helped our members.
How did the board of directors react to the idea?
DS: Our board was cautious and initially did not approve the merger. It wanted to guard the assets of the membership, which is its job. Twice the board members voted against it because they couldn’t get comfortable with it. The third time the regulator helped explain the partnership aspect — we were helping solve a problem and would have time to solve that problem. Ultimately, this would help achieve our strategic initiative of geographic diversity and less concentration in one area. Eastern had been around a long time and was well regarded by its members. We believed if we combined the two institutions, we could create better operating efficiency than we could achieve alone.
What was the initial impact on Space Coast's net worth ratio?
DS: On March 31, 2009, Space Coast had a net worth-to-total asset ratio of 9.46%, which was comfortably above the 7% well-capitalized requirement by the National Credit Union Administration (NCUA). On June 30, after the NCUA and the Florida Office of Financial Regulation approved the merger, Space Coast’s ratio fell to 6.26%. As of March 2013, the ratio has rebounded to 10.22%.
How did the credit union plan to restore its capital?
DS: We tried to put certain things in place to increase efficiency. Overall, we believed if we did the right things, the right outcomes should occur over time. If we could generate member value by efficiently increasing production — particularly in auto and mortgage lending — then we would move the entire credit union in a positive direction. Space Coast has a unique way of providing service and planned to implement that service model throughout the Eastern branches.
What is that service model?
DS: We understand members are on their way somewhere else, and our operating maxim is “we provide service along the errand route.” Time is our value proposition. We implemented our “express” service model in 1997 primarily to reduce wait time. Space Coast was pretty heavily branched and had a hard time getting members in and out during their lunch breaks. People were waiting in the lobby for member service reps to help them with complex needs — such as opening a new checking account or applying for a loan. So we moved sales-related functions out of the branches and into a centralized call center. Branch staff walks a member to a phone wired to our sales center and introduces them to the representative who can help.
The call center staff is efficient and effective because they are commissioned sales people. Average wait time has dropped from almost an hour to 10 seconds. From a cross-sales and production perspective, it is better because reps are able to interview the member to truly understand their needs and suggest beneficial products.
We knew if we could implement the same model at Eastern, we could increase efficiency. We expected the implementation to take time and were delighted when the management team implemented the model a full year before the systems conversion. This helped us reduce branch operating expenses sooner than anticipated. We have roughly half the number of employees in our branches versus our competitors. We need fewer branch staff because we don’t have the member service rep function within the physical branches.
What was the estimated timeframe to rebuild the credit union’s capital?
DS: There was never a date on the calendar, but we needed to make sure we were moving in the right direction. We were bringing on new assets with no retained earnings, so we had to figure out how to be more productive and efficient. Space Coast is pretty conservative and is careful when taking on new programs. We don’t chase income in the investment portfolio or implement the newest loan program.
Eastern was not doing any auto or mortgage lending when we merged, so we had the opportunity to ramp that back up in the South Florida market. The Eastern membership has been fantastic, despite the April 2009 conservatorship there weren’t any runs on deposits and the existing employees did a great job with the members. We wanted to build on Eastern’s strengths and have retained many of the branch management and employees that were key during the transition.
Did the capital restoration plan required any re-tooling along the way or has it gone according to plan?
DS: We knew capital would come back if we did the right things, and it came back. If external factors were different, it might have gone differently. Net interest margins are tough now, which means the production we’ve achieved hasn’t created as much income. It’s all about production and efficiency.
Exercising those fundamentals correctly allows you to weather delinquencies. We still have a larger delinquent portfolio and continue to work through foreclosures, which take a long time in Florida. However, consumer loan delinquency is low and our new production is performing well. By focusing on the fundamentals, growth becomes an outcome and so does positive net worth.
We also eliminated distractions. We had membership in the Tampa area that we’d never developed, so we spun it off last year through a merger of partial membership to Mid-Florida Credit Union. The credit union is headquartered in Tampa and we thought it would take good care of the members. We spun off the Jacksonville market for the same reason.
What advice would you give another credit union considering a similar merger?
DS: Be darn sure you know why you’re doing it. There should always to be a reason beyond growth. You have to know what you do well as an organization and see if the opportunity fits. A lot of people asked me if we’d keep the Eastern name and I said, “No.” We can’t have a split personality and operate two different ways.
Be who you are and don’t get distracted with anything else. Create better value for the existing members. If that had not been the case with Eastern, we never would have considered it. We took a long-term view and knew 10 years down the road we could say this helped us achieve our strategic goals and created efficiencies that benefit our members.
Are there any lessons learned that surprised you?
DS: We learned a merger like this is costly for personnel. We put people on the road for two years to manage divisions and deal with large-scale issues that were never within their original scope of responsibility. This was taxing for our employees and member service.
During the system conversion, call center volumes tripled and we had boots on the ground to provide face-to-face guidance for several weeks after the conversion. This brought us all together as a team, but all told the conversion cost more than 200,000 hours of employee time. Those were hours not spent serving the members.
Anything else you’d like to share about the merger or capital restoration?
DS: My board was courageous in its decision. The easy thing would have been to say “no.” I credit our board members because there was critical analysis and they did a great job safeguarding the Space Coast members.
The management and leadership team really pulled this off. It was almost superhuman what some of our managers did, and I’m proud of their accomplishments. We learned a lot about project management and team function and communication during these past few years.
The membership on both sides was amazing as well. They were patient during the transition to the express service model and system conversion.
Overall, the merger was a redefining moment for us that fundamentally changed who we were.