Before David A. Kwant joined Mountain America Credit Union nearly 25 years ago, he was Utah’s supervisor of credit unions. So how does that experience help him as chief financial officer at the $3 billion West Jordan, Utah-based credit union?
“It helps me get into trouble,” he said with a chuckle. “I argue too much with them.” But he admitted that it is helpful to know what examiners are looking for on the financial side and making sure that the appropriate records and documentation is available.
And does his experience as a regulator give him an insight into an examiner’s way of thinking?
“Well, it used to. But today, I don’t know what they’re thinking anymore,” he said, noting a change in the way they now approach exams.
“They come out with a letter that says best practice says you have to do this. So they are expecting you to do that. And if you don’t they escalate it on their comments the next time they come around,” Kwant said. He added that this cookie-cutter approach may be dangerous and likens it to farming.
“If everyone is growing the same crop of corn, everyone is going to get the same disease. If everyone is using the same best practice, which may have a vulnerability that no one has really seen, everyone could have the same problem because everyone was forced to do something the same way.”
Utah didn’t get hit as hard as other sand states by the Great Recession. “Our unemployment rate has always been anywhere from 75 to 100 basis points below the national unemployment rate,” he said. “We did take a hit on real estate values, so we took our lumps there.” And “the income- generation side of the equation didn’t miss a beat. Profits were down because loan losses were up, not because income was down.”
Among large Utah-based credit unions, the 354,000-member Mountain America beat its peers last year in efficiency, loans to shares ratio, and return on assets, according to data from Callahan & Associates.
“Efficiency ratio is one to keep your eye on,” said Kwant. “It’s not the only one to watch, but it is a measure of what it’s costing you to earn a dollar. The return on assets is one of those ratios that you look at. It reflects how loaned out you are, and I think that has been one of the successes of Mountain America.”
“We’ve always had minimum investments and maximum loans. And as a result that income side didn’t really dip much during the recession,” he added.
Mountain America’s net income rose consistently in 2011. And at year end it posted an 82% gain in net income over the previous year, from $16.3 million in 2010 to $29.6 million in 2011. Kwant attributed that mostly to a decline in the credit union’s loan-loss provision. The provision declined to $39.3 million at year-end 2011 from $56.5 million at year-end 2010. That was possible by facing reality on bad mortgage loans, said Kwant. Reality and some creative thinking.
“We have a very good collections department, and they collected what they could. And we had the intellectual honesty among senior management that we needed to write this stuff off. There is no need thinking we are going to get something when we know we are not going to get it. We aggressively charged off those things we deemed uncollectible, and we salvaged what we could where there was something to salvage,” he said.
Marshall Paepke, Mountain America’s executive vice president and chief administration officer, said Kwant showed great leadership in guiding the credit union in its approach to the disposition of REOs.
“In mid to late 2008, after a merger, we began to see an increase in our REO portfolio. At the time, many experts were predicting a quick turnaround and recovery of the economy. Dave's philosophy was the credit union's first loss was the least amount of loss. In other words, don't hold on to REO properties thinking the market is going to return before you begin to market them for sale,” Paepke said.
Kwant’s reasoning was that if the credit union is already taking a loss through the write-down process, don't risk taking another loss by waiting for the market to recover before selling the REOs, added Paepke. “Mountain America's strategy was that the first loss was the least amount of loss, and we were able to sell most of our properties within an acceptable time frame,” he said.
A year after Mountain America sold the majority of the REO properties, it looked back, and an analysis showed that it saved at least 10% by working this strategy.
“If we would have held the properties and waited for the market to return before aggressively selling the properties, we would have taken additional write-downs of 10% or more of the REO portfolio value,” said Paepke.
Another reason for success at Mountain America, according to Kwant, is loan portfolio diversification. “It’s like diversification in a stock portfolio. When one stock is up, another one is down, but you’re maintaining a constant return.” In addition to mortgage and auto lending and credit cards, member business loans backed by the Small Business Administration and life style lending are all part of Kwant’s recipe for portfolio diversification.
Mountain American has been making SBA loans for about five years, and Kwant calls it a developing business. “But the key is the government guarantee, so we are loaning to people with a little bit higher risk than you’d normally loan to. Some make it, some don’t.”
The credit union earlier this year won two awards from the SBA’s Utah District by being named 2011 Lender of the Year and receiving the 2011 Blaine Andrus Memorial Award. The latter, which is named for a leader in the Utah SBA office, recognized the credit union’s community efforts and the diversity of its small business lending programs.
“As CFO you have to look at the financial side of things, but the financial side is just one ingredient in decision making.” Kwant is proud that some decisions were tempered by his input. “When we first started to do indirect lending, I tried to remind them that if we overpaid the broker, it just hit too much of our return, and the synergies wouldn’t pay off. So they built in some penalties if [the loan was] paid off too quickly.”
According to Paepke, during the recession many CFOs were focusing on cutting costs. “Although we were looking at ways to be more efficient, one of the reasons for our success in 2010, 2011 and so far this year is the encouragement from Dave to keep the course of investing in employees, investing in member service and investing in the communities we serve,” he said. “CFO's to a large degree control the purse strings of the credit union. Dave has never tried to close the purse at the expense of investment and growth.”
Sterling Nielsen, president/CEO at Mountain America, added, “More than having an amazing knowledge base, Dave has wisdom—that special ability to skillfully apply his knowledge to financial issues and opportunities.”
Kwant, 65, has a bachelor’s degree in accounting from the University of Utah and is a certified public accountant. He and his wife, Carol, will celebrate their 41st anniversary this June. They have four children and three grandchildren. “And two more on the way,” added Kwant.