Pendulik Tackles Low Demand for Loans
- In anticipation of negative loan growth, Pendulik sought additional sources of investment products during December 2009.
- He successfully managed the investment portfolio in 2010, which grew by more than $30 million, an almost 50% increase.
- 'It is amazing to look back in time three years and see that not only were Jim's predictions accurate, but more importantly, his preemptive strategies were spot on.'
Over his 37-year career in financial services, James Pendulik frequently pulls from an old sports expression: "You need to have the horses."
The senior vice president, chief financial officer and chief operating officer at the $238 million Fairfax County Federal Credit Union in Fairfax, Va., refers to the idiom when it comes time to move beyond talk and start the walk to carry out strategic plans.
"You can have the best crew, the best equipment, but you need to have the horses," Pendulik said.
For his foresight and no- nonsense approaches to helping Fairfax’s balance sheet management, investment expertise, ALM acumen and distressed loan workout and collection, Credit Union Times has named Pendulik 2011’s Trailblazer CFO of the Year.
Pendulik said he could see the train coming down the track following an extremely difficult 2009 as the credit union searched for ways to return to profitability, reduce loan delinquencies and plan for an immediate future of unprecedented lower loan volumes and low interest rates.
In anticipation of negative loan growth, Pendulik sought additional sources of investment products during December 2009. His instincts proved correct as Fairfax’s existing approved broker-dealers, although still supplying what he described as excellent quality, proved unable to provide quantities that would have been needed to absorb all of the credit union’s excess cash. The addition of new qualified broker-dealers allowed Pendulik to successfully manage the investment portfolio in 2010, which grew by more than $30 million, an almost 50% increase, and boosted yield by more than twice the peer average, he said.
Like many credit unions, Fairfax grappled with delinquent loans. Still keeping his eye on that picture of anticipated negative loan growth, in the first quarter of 2009, Pendulik refined some of the new initiatives in place and directed the collections department to follow through.
Automated calling directed to all loans five or more days past due was installed, all letter and personal contact timeframes were compressed and accounts were referred to council as soon as Fairfax’s internal efforts were exhausted.
All newly delinquent loans were reviewed for remediation possibilities with borrowers whose circumstances allowed for consolidation and/or refinance, and contact by phone and in writing was initiated, Pendulik said. New offers were approved by him before being presented to the borrower. The swift actions proved successful. Fairfax’s delinquency ratio declined by more than 50% from 2009, charged-off loans were down nearly 40% and the credit union’s provision for loan loss expense had been reduced by almost 60%, Pendulik said. Fairfax maintained a loan loss allowance that represented nearly 400% of reportable delinquent loans and almost 2.50% of its total loan portfolio.
A typical day for Pendulik starts with tracking data and looking for patterns over time. Spotting trends helps foresee where adjustments or introductions can be made with products and services. He looks at totals on trial balances with checking, savings and certificates of deposit. There might be a preponderance of longer-term CDs, for instance. In Fairfax’s case, there is roughly $13 million in CD specials that could extend out to five years. That group is due the first quarter of 2012 with rates north of 5%, Pendulik said. He’s already thinking about coming out with a CD offering or putting a blend in the mix. In terms of cost of funds, there is some maneuvering room.
The reports are sent to Fairfax’s CEO and senior managers each day. If major fires don’t disrupt his morning, Pendulik will then assess the credit union’s investment portfolio, which has become a large portion of the balance sheet.
"After the economy upheaval, lending declined. People have stopped borrowing. We have offerings with extremely attractive rates but very few takers," Pendulik said. "Deposits are not going away."
Pendulik always checks in with the collections department in part, to look at the potential for any restrictions or consolidation. Fortunately, that scenario has waned over time, he noted. He’s always looking at reportable delinquencies. Items that are 11 days overdue with no late charges are tagged. He recalls looking back at reports from December 2007 where the data showed total delinquencies were holding their own but the reportables were not that high.
To stay ahead even further, Pendulik directed the frequent modeling and reviewing of Fairfax’s asset liability management to monitor possible effects on future net interest income and to ensure that the credit union was not accepting any undue interest rate risk. Pendulik said this was achieved through careful balance sheet management including placing few fixed rate mortgages in the loan portfolio. Only shorter term high quality loans were retained with the balance being sold into the secondary market. The investment portfolio was actively managed and consists of chiefly collaterized mortgage obligations.
The yield is kept high through careful balancing of fixed, floating and inverse floating agency securities and carefully selected high quality private label issues that are analyzed monthly for other-than-temporary impairments (there is none, he pointed out) and vectored using current data to project the possibility of loss of principle, Pendulik said. The combination of interest income maximization, interest expense control and a significant reduction in Fairfax’s provision for loan loss allowed the credit union to transform its bottom line from a loss of $2.4 million in 2009 to net income in excess of $200,000 in 2010.
Finding the voids, making the connections and implementing the changes are all tied to a CFO’s ability to see the big picture, some would say. When asked when he started his career, Pendulik, a CPA, was somewhat startled when he realized how long ago that was–1974. His experience includes time at a New York bank and a credit union in Manhattan before coming to Fairfax in 2004. He said he considers himself fortunate that he has been exposed to virtually every area of the industry from audit and accounting to treasury, operations and lending. The only department he hasn’t worked in is information technology. Pendulik saw the fallout and took note of the lessons from the thrift and savings and loan crisis in the late 1980s.
All of those experiences have helped hone Pendulik’s ability to see into the future and yet still maintain complete control over all of the little details and nuances of everyday business, said Nicole Bowen, vice president of operations and risk management at Fairfax.
"It is amazing to look back in time three years and see that not only were Jim’s predictions accurate, but more importantly, his preemptive strategies were spot on," Bowen said.
That vision led to Pendulik designing two new relationship checking products in 2010 in the credit union’s continued mission to make Fairfax the primary financial institution for its members. He re-priced and modified four existing checking products to more securely enhance their relationship characteristics. As a result, the development of relationship members allowed Fairfax to reduce its cost of funds by 40 basis points. The tweaks also reduced the strain on the bottom line from margin compression, he added.
Last year, Pendulik also had the card services department complete a second review of Fairfax’s credit card portfolio to assess credit migration and reduce available lines when indicated, which reduced the propensity for additional losses going forward. In many instances, card balances were converted to term loans or consolidated with other secured debt. This reduced the cash flow burden on the borrower.
"The benefits from these techniques were many. We reduced losses and delinquency, replaced unsecured debt with fully or partially secured debt and reduced the rate of balance decline of our loan portfolio," Pendulik said.
When Pendulik became chief operation officer at the end of 2009, he worked closely with the branch coordinator. A survey sent to members at Fairfax’s five branches helps to pinpoint which products and services they would like to see.
When asked how CFOs are perceived, Pendulik chuckled at one of the stereotypes.
"That we sit in the corner all day long, wearing a little green visor. And, no one knows what we’re thinking. For me, everyone knows. They know what I am expecting. To me, it’s matter of fact."