Esrael's Trial by Fire Helps His CU Ride Out the Great Recession
At 24 years old, right out of graduate school, Craig Esrael took over First South Credit Union in Bartlett, Tenn. Excited, confident and perhaps a little na?ve, Esrael entered a credit union on the brink of NCUA conservatorship with six quarters of losses, total capital of less than $2 million, the second worst CAMEL score granted, high staff turnover and six CEOs in seven years.
Esrael, not discouraged, hit the ground running and developed a plan to turn it all around.
That was 1983, now First South has over $92 million in total capital, the longest consecutive history of perfect IDC scores out of all financial institutions in Tennessee and the third longest history in the entire nation, 16 consecutive years of perfect five-star ratings from Bauer, a strong capital position and 14 branches. As of June 30, 2009 First South Credit Union recorded the third highest net worth-to-asset ratio in the nation for credit unions with more than $150 million in assets and the second highest ROA, for credit unions with more than $20 million in assets, out of all credit unions in the nation at 3.55%.
"There are a lot of similarities between then and now. At the time, we were going through the worst recession before now. When times are good, it's easier to get by with inefficiencies, but when times are bad, it exposes weaknesses," Esrael said.
The difficult thing, he said, is that the time the credit unions need to raise net income the most are the times when it's not possible to do it, so the only option seems to be to cut costs to the bone.
"As credit unions see earnings recede, they reduce staff and cut branches. Reducing staff causes good employees to leave and has a cultural impact on the organization. Cutting branches shows members that the credit union is having financial problems. You drive away good employees and members."
Esrael recommends that CEOs leading struggling credit unions right now make sure that their staffs understand the challenges facing the credit union and what it will take to overcome them.
One of the first things Esrael did when taking over First South was make sure all staff was involved in the planning process, and he started to include staff on the reading of the credit unions financial statement. It is important also, he said, to have an intimate understanding of the credit unions cost structure.
"I wanted everyone down to the newest teller to understand our financial statement. Once things started to improve, the staff took satisfaction in being able to see the improvements."
Esrael's new policies were not readily accepted by everyone though. The credit union had a deep-seated culture of employee turnovers and low morale, and Esrael faced resistance among some to change.
"The staff was used to the CEO turnover, and some thought I was just the latest victim. They thought if they put their head down and dug their heels in, I would go away. Of course, there were staff members and board members that needed to find other opportunities. They did not fit what I wanted our new culture to be, and we needed to be separated," Esrael said about how he dealt with some of the resistance.
For the most part, he added, he tried to lead by example and make the staff part of the solution rather than the problem.
"I was there in the morning when the staff arrived, and I was there at night when they went home. You often see CEOs communicate less in times of challenge-when they should communicate more."
Esrael started a profit-sharing program to distribute some income to the staff and developed incentives for staff that signed up members to new products or contributed ideas on how to cut costs. Eventually, as the credit unions financials turned around, the staff turnover rates decreased.
Another tip Esrael gave to CEOs struggling with this recession was to diversify the income base and know the competition.
In the early 1990s, First South had reached a CAMEL 1 rating and had achieved a solid financial foundation. In 1993, Esrael headed an effort to convert from a federal charter to a state charter and change the credit union name from Navy Memphis FCU to First South. A full-service mortgage department was developed as well as an investment CUSO, First South Investment Service Inc., to compete with local banks. In 2004, Esrael took the credit union through another charter conversion from multiple common-bond to a community charter.
The first charter move, allowed the credit union to dodge a crisis. In 1994, a major sponsor moved its training activities to Florida. The move to a community charter allowed the credit union open up a new location in an area where many consumers were moving to take advantage of lower property taxes and better schools.
One thing many CEOs don't realize, Esrael said, is the connection between financial strength and service. When he first came to the credit union, it was losing members rapidly and the average deposit was low. As things started to improve, Esrael said that members started to see a positive difference quickly.
"As staff turnover was reduced and staff morale increased, of course, member service improved, and as we became stronger financially, we were able to offer better prices and more products and services. You cannot serve your members to your full potential if you are financially weak and your team is not proficient and motivated."
Unlike many credit unions, to deal with the current recession, Esrael said First South hasn't had to implement any changes. Last year, the credit union opened a new branch, and it has the same marketing budget as years before.
"I think a proper analogy is the child who grew up in the heart of the Great Depression that lives a conservative life. First South is like that. We learned to be smartly conservative. We've been building capital and efficiency over 27 years."
First South has the same number of employees as 14 years ago but has more branches and services. Other CEOs, Esrael said, have criticized him for having too much capital at over 26%.
"Some say that we should be paying that back to members, but I think there is nothing wrong with saving capital for rough times. We pay less on loans than our competition and have higher deposit rates than our competitors, so members are getting good service."
One difference between the recession Esrael faced when he first came aboard First South and the recession now, he said, is that the NCUA was more patient in 1983. If a credit union is in a downward spiral that it just can't get out of, Esrael recommends finding a merger partner prior to the NCUA stepping in.
"Be proactive and not reactive. If you're in too deep of a hole to get out of, then you owe it to your members to find a partner. The ending result will be better than if you are forced into it."