CU QUICK FACTS
HQ: Panama City, FL
Data as of 03.31.19
12-MO SHARE GROWTH: 39.0%
12-MO LOAN GROWTH: 8.2%
In 2004, a sleepy little credit union on the white, sandy shores of the Gulf of Mexico woke up.
The two preceding years were hard for the then $80 million NCSC Federal Credit Union, which was experiencing negative loan and membership growth, as well as declining employee morale. The credit union’s name at the time — in reference to its founding sponsor, the Naval Coastal Systems Center — did it no favors in attracting new members. Overall, a lack of strategic vision left the credit union in a bad place financially.
“You could see it on the horizon,” says current CEO David Southall. “This credit union was not going to survive.”
Southall would know. He joined the credit union in 1987 as a teller and had worked his way up to the head of lending. In 2000, he’d read the writing on the wall and took a position with CUNA Mutual, a post he’d hold for the next four years. Then his phone rang with a call from the credit union’s board chair who asked if he was interested in taking the reins of the credit union he knew well.
He was. On four conditions.
It needed a new name.
Its branch footprint had to expand.
It would institute a sales and service culture.
The work environment would improve.
A new direction set, the rebranded Innovations Federal Credit Union ($272.5M, Panama City, FL) was primed for positive change.
BEST PRACTICE: DITCH THE NAME. KEEP THE COMMUNITY FOCUS.
Innovations FCU was granted a community charter for Bay County, FL, in 2003. To reflect its new community-wide openness, finding a modern, progressive name was a priority for the credit union. “It doesn’t suggest any specific location, group, or place,” CEO Southall says. “It also challenges us to remain ‘innovative.’”
“Over my first few years we made a lot of changes,” Southall says. In the years since, those changes have borne fruit in the form of healthier finances, more efficient internal processes, and increased technological and operational capacity. But there have been bumps along the way.
In the past decade, the Florida credit union has faced three disasters that have altered its sense of normalcy as well as the fabric of the community it serves: the Great Recession; the 2010 BP oil spill; and, most recently, 2018’s Hurricane Michael, an epic blow from which the region is still recovering.
“It’s changed our community,” Southall says. “It’s changed lives.”
But the credit union and its people are resilient. It was built that way.
Building A New Credit Union
Once Southall took over as CEO, change happened fast.
He hired Scott Gladden and Karen Hurst in 2005, who’ve since become chief operations officer and chief marketing officer, respectively, and comprise half the senior team — along with Southall and 2012 hire CFO Jeremy Hinton. That same year, Southall removed teller lines from its branches entirely; instead, opting for a dialog banking approach that continues today. In possibly the hardest change, the move to a sales and service culture caused approximately 50% of front-line staff to self-select out in a short timeframe, which, while difficult, allowed the credit union to bring in new employees who more closely aligned to the credit union’s culture.
“We were a sleepy little credit union with an order-taker culture,” says CMO Hurst. “We had all worked in other places before this and we knew we wanted to build something different at Innovations.”
“It was a challenge,” Southall says. “But it also needed to happen.”
Who Wears The Hats?
Innovations FCU is a small credit union. And as a small credit union, its executives must wear a number of hats to ensure smooth sailing. Not including CEO David Southall, who helps make business lending decisions, here’s the responsibilities each of its senior team members holds:
Scott Gladden, COO: Lending, Branches, BSA/Compliance
Jeremy Hinton, CFO: Accounting, IT, eServices, Projects
Karen Hurst, CMO: Marketing, HR, Training, Branding
In October 2005, Innovations merged with Gulf Coast Postal FCU, adding nearly 1,000 members (and one branch) to the fold. For the next several years, the credit union grew well. Between 2005 and 2010, total loans grew more than 150% and total members by more than 80%, both rates far outstripping asset-based peer performance over the same period. The credit union also added three additional branches to its network, for a total of five.
Like many a Sand State financial institution, Innovations felt the force of the Great Recession. By late 2008, its loan growth had peaked and begun a descent into what was eventually two years of negative growth in the early 2010s. In addition, net worth fell from a high of nearly 10% to 7.30% in late 2010. Asset quality worsened, as well, and took an even greater hit when, in April 2010, the Deepwater Horizon oil drilling rig exploded 40 miles southeast of the Louisiana coast. The result was the largest marine oil spill in history, and the impact was felt across the Florida Panhandle.
“It decimated our tourist season,” says CFO Hinton. “Everyone who works and supports that industry lost income, and it affected us. Charge-offs spiked.”
TOTAL DELINQUENCY & NET CHARGE-OFFS
FOR Innovations FCU| DATA AS OF 03.31.19
In the wake of the Deepwater Horizon oil spill in 2010, Innovations’ net charge-offs peaked at 2.2% in the first quarter of 2012 before tapering off well below peer average.
Source: Callahan & Associates.
As the credit union regained a sense of normalcy in the wake of both events, it recognized the need for additional operational changes, each made with an eye toward improving efficiency and increasing Innovations’ essentialness to its community.
First and foremost, COO Gladden and CFO Hinton helped oversee a change to the credit union’s loan portfolio monitoring. In the wake of the recession and oil spill, Innovations changed its TDR accounting methods, implemented branch-level tracking, and dialed into the granular details of its loan portfolio.
“Which products were doing well for us? What credit tiers? Which ones were giving us the most heartache?” Hinton asks.
One product the credit union felt could provide even greater benefit to its members: business loans.
In the wake of the recession many community banks in Bay County closed, leaving with them a population of potential Innovations members in need of business services. The credit union recognized this, and in late 2013 hired a community development officer, David Powell, specifically to drive awareness and usage toward its full suite of business products, which is branded as Octane Business Solutions, powered by Innovations. And if the need was apparent, the interest was actualized: In its nearly six years actively promoting its business services, Innovations’ member business and commercial lending portfolios have grown some $30 million — or 1,000%. This, despite a reclassification in the reporting standards for single-family residential properties.
To learn more about Innovations’ business lending success, read "How To Build Businesses And Re-Build Fences".
After modernizing loan monitoring standards, Hinton helped the credit union turn its eye toward updating several internal processes, including converting their card processor and online and mobile banking providers.
“We’re always pushing for efficiency and doing something better than we did before,” the Innovations CFO says.
Recently, that’s meant researching ways to outsource where it can. In early May, Innovations finalized outsourcing its check processing software, and by 2020 it hopes to have both its core processor and its network outsourced.
Today, both systems live on-site at the credit union’s headquarters with business continuity backups off-site — in the case of its core processor, at an out-of-state hot site in Birmingham, AL. While doing its due diligence on possibly changing this arrangement in early 2018, Innovations leaned toward bringing on-site backup generators (which run on natural gas) to power its systems in case of emergency rather than relying on a hot site.
“Thankfully we never made a decision,” Hinton says.
Why? Because on Oct. 10, 2018, Hurricane Michael, a Category 5 storm, slammed into the Florida Panhandle, destroying houses, power lines, and disrupting all sense of normalcy in Bay County and its neighboring communities. Water, thankfully, was never an issue for those affected. The real problem was gas.
“When we thought about making the change, we talked with the gas company, and they said that even in the storms they don’t cut off the gas lines because so many people run off generator power,” Hinton remembers. “Well, you live through the storm and guess what? They shut off the gas.”
We’re always pushing for efficiency and doing something better than we did before.
Of Recovery And Run Off
Hurricane Michael was a catastrophe from which Bay County is still recovering.
“It’s changed lives, it’s changed our community,” says CEO Southall. “Since October, everything has been focused on recovery.”
The hurricane caused 49 deaths and an estimated $25 billion in damage. By early April, work crews had removed an estimated 31 million cubic yards of debris in Florida, yet the October event remains overshadowed in the popular conscience by other recent storms.
According to an April report in The Washington Post, the American Red Cross counted donations totaling $35 million for Hurricane Michael victims through the end of March. Hurricane Florence, which hit the Carolinas in September 2018, drew $64.3 million; 2017 storms Hurricane Irma in Florida and the Caribbean and Hurricane Harvey in Texas drew $97 million and $522.7 million, respectively.
For Innovations employees and many Bay County residents, the total is disappointing. FEMA has provided more than $1 billion in Michael-related relief, but the need is significant and continues to grow.
More than one-third of Tyndall Air Force Base, Bay County’s largest employer, was destroyed, according to the Wall Street Journal, and its future remains in flux. In addition, many community residents continue to live in temporary housing, destabilizing thousands of families.
“I don’t know a single person who didn’t have some damage to their home, most of it significant,” COO Gladden says.
“It’s hard to imagine,” CMO Hurst says. “It was apocalyptic, really.”
CEO Southall, who was displaced by the storm, has been moved into four different temporary housing situations since October. “My family have become ‘nomads,’” he says. “And it’s starting to feel normal.”
Click the tabs below to view graphs.
FOR ALL U.S. CREDIT UNIONS | DATA AS OF 03.31.19
After a natural disaster, members look to put their funds in a safe place: at the credit union. In the aftermath of Hurricane Michael, Innovations has seen two quarters of nearly 40% deposit growth. Based on analysis run by its CFO, however, hurricane-related deposits will have peaked by late May/early June — a gradual runoff should occur over the next seven months.
TOTAL DELINQUENCY AND NET CHARGE-OFFS (2014-2019)
FOR INNOVATIONS FCU | DATA AS OF 03.31.19
In the past five years, Innovations’ credit quality has steadily improved. And even after October’s storm, the cooperative’s total delinquency and net charge-offs represent a post-recession best.
MEMBERS PER POTENTIAL MEMBERS
FOR ALL U.S. CREDIT UNIONS | DATA AS OF 03.31.19
Innovations’ members per potential members percentage of 13.5% sits well above national average. In the coming years, the credit union will look to expand its potential membership base with an eye toward growth.
COMMERCIAL & MEMBER BUSINESS LOANS / TOTAL LOANS
FOR INNOVATIONS FCU | DATA AS OF 03.31.19
To fill a perceived service gap, Innovations ramped up its business services starting in late 2013. In the years since, the portfolio has grown well, and may provide added benefit as Bay County looks to rebuild.
FOR INNOVATIONS FCU | DATA AS OF 03.31.19
With its influx of deposits, Innovations is working to manage its liquidity as it prepares for the eventual runoff. How? By investing funds in short-term investment products.
INVESTMENT INCOME/TOTAL INCOME
FOR INNOVATIONS FCU | DATA AS OF 03.31.19
Innovations is putting its members’ deposits to work - in the form of short-term investment products - and being rewarded for it. As a percentage of total income, investment income has grown more than 10 percentage points in two quarters.
The hurricane displaced many, and the damage has created a domino effect. Families lost houses, mobile homes, and apartments, driving rent up at those residences that sustained less damage. That resulted in families leaving the area entirely, not to mention others who remain effectively homeless in temporary housing. With a smaller student population, three area schools haven’t reopened, and the Bay School District has lost or laid off approximately 450 employees and teachers since October.
Innovations felt the impact, as well.
Each of the credit union’s branches was hit, with varying degrees of severity: from a few shingles blown off one location’s roof, to another that still hasn’t reopened nearly eight months later. With damage comes insurance claims, however, and CFO Hinton reports Innovations has collected some $956,000 on four locations; as of mid-May, the credit union is still assessing damage to two other branches, which means it may collect additional insurance payments in the coming months.
“We’ve all become insurance experts,” CEO Southall says.
The biggest balance sheet impact, however, has been to deposits. Innovations added approximately $70 million in shares between third quarter 2018 and first quarter 2019, turning a $200 million credit union into a $270 million credit union almost overnight.
“Deposits go up, assets go up, but your net worth stays the same because we’re not making money that fast,” Hinton says. “So, all our ratios hurt.”
To wit, net worth dropped 2 percentage points, while the credit union suddenly became extremely liquid with funds it wasn’t sure how long would remain on its balance sheet. Operationally, the storm’s timing did the credit union no favors — it was budget season. To project how this influx of funds would eventually run off, Hinton looked west.
Hurricane Katrina hit New Orleans and environs in August 2005. To predict Michael’s impact in 2019, Hinton analyzed what happened with deposits at Katrina-affected institutions. He found that seven months after that storm deposits had spiked and plateaued — nine months after that, they had run off entirely. For Innovations, this meant deposit activity was likely to return to normal in the first few months of 2020, which helped set the plan for 2019.
“We had to make sure we had the liquidity to support withdrawals,” Hinton says.
To that end, Innovations has put these deposits to work, investing funds in short-term products to match maturities with projected withdrawals. At first quarter, Innovations’ investment portfolio totals more than $90 million, a 325% increase from two quarters ago, the vast majority of which are set to mature in the short-term. Income from investments has jumped 77% over that same timeframe.
“We have $5 million a week that’s maturing,” Hinton says. “Our plan is to watch for the first signs of run-off, and we’ll adjust our investment strategy accordingly.”
Beyond its balance sheet, Innovations is working to take care of its affected members. The hurricane disrupted things for many, and the credit union is working to be part of the solution.
“It’s going to take time for this community to get back to where we were,” Hurst says. “But we want to do whatever we can to help bring it back.”
BEST PRACTICE: BECOME THE EMPLOYER OF CHOICE
Before the storm, one of Innovations’ areas of strategic focus was to become an employer of choice for Bay County residents. In the years leading up to the storm, Innovations improved its benefits package: it now matches 5% of an employee’s salary as a 401(k) contribution, and employees can earn an additional 10% of their salary with a discretionary profit-sharing program. Innovations also introduced four levels of financial service representative with escalating responsibility and pay to encourage retention. In the wake of the storm, meanwhile, to keep pace with tighter job market, the credit union raised its entry-level hourly wage.
Innovations has tackled local recovery in three ways: products and services, community donations, and employee benefits.
Before the storm, Innovations had implemented DocuSign for loan eSignatures, so when the credit union introduced hurricane relief products, members could apply and complete the process from the safety of their own homes.
Innovations offered a $3,000 Hurricane Assistance Loan at 5% interest; 90-day loan deferments on any portfolioed loan, including credit cards and mortgages; and a waiver on certain fees, including overdrafts. It also suspended reporting to its two credit bureaus, TransUnion and Equifax. Its overflow call center partner, LSI in Chicago, pitched in by fielding every incoming member call, but the credit union’s senior team also published their personal cell phone numbers online and on social media to handle any pressing member questions that arose.
The goal was to get members the services they needed, with as little disruption as possible. That worked. Michael made landfall on Wednesday, Oct. 10; the credit union was back up and running — in a limited capacity — by Oct. 14, the first financial institution in the area to do so.
To learn more about the credit union’s business continuity and disaster recovery efforts in week after the storm, read "A New Normal".
In the aftermath of the storm, member needs were immense. As the months progress, and the credit union recognizes areas of continuous need, its donation dollars have become more targeted. Before the storm, Innovations would donate charitable funds to large organizations with a local presence, such as the United Way and the American Heart Association, among others. After the storm, Innovations focused its efforts on larger one-time donations to local schools, universities, and food banks, as well as supporting additional educational fundraisers.
“It’s a new normal down here,” Hurst says. “We’ve given more money to the schools than we did before, but there are still many children in our community in need.”
Employees, too; after all, they live in the same affected communities. But a balance must be struck. Because the credit union provides financial services, it needs to make every effort to open in an emergency scenario. That said, because it employs local people, it needs to alleviate human-level concerns. That second can’t point can’t be overstated.
“Make sure everyone is fine, everyone is safe, and that we’re willing to support them however they need,” CFO Hinton says. “And then have them check with us and see what we need them to do.”
Innovations guaranteed every employee a job after the storm and provided each with two weeks’ pay, whether they were able to work in that period or not. The hurricane created further uncertainty in its local job market, however, which required the credit union to more fully focus on its hiring and retention strategies. At first quarter, Innovations’ average salary and benefits now rank highest among the four credit unions with a local presence.
As Bay County continues to heal, the credit union has its sights set on the future. CEO Southall estimates recovery efforts lasting another six to 12 months, after which Innovations hopes to reach a sense of normalcy financially and within its community. Southall has set several goals for his institution, as well. Operationally, he’d like to introduce a formal succession plan, guarantee his shop’s relevancy for the next generation of member, and ensure the credit union’s brand remains strong. On the financial side, he’d like to continue to grow the organization. Whether that requires a merger or community expansion, he’s not sure, but it’s a question worth asking.
It’s been 15 years since that sleepy little credit union on the Gulf of Mexico woke up, and in that time, Innovations has seen the good and the bad; hit some highs and felt the lows. But it’s still standing on those same sandy shores, stronger for the experience.
“I’m proud of what we’ve done. The people here are strong and resilient,” Southall says. “Time heals all, so life is good.”
Wait, There’s More!
This is just one section of the Anatomy Of Innovations Federal Credit Union series that appears in Credit Union Strategy & Performance. Read the whole discussion today.