ihab itani, eleanor, justas, sanchit-florida financial hurricane-credit union risk

BY: IHAB, ELEANOR, JUSTAS, SANCHIT

9/10/2014

Sunbeam Florida Financial Hurricane:

A Credit Union Risk Management

Table of contents Case Introduction Outline Florida History Credit Union Crisis in US Effects of the Crash 3 Waves Credit Union Structure Financial Crisis Impact on Credit Union Simple Roots Rise of the problem Frozen Market Relation to CRM 4 Scenarios Created Conclusion/ Recommendation

Case Introduction

The peril of today in the post–financial crisis era is that the most of credit unions are too risk averse

They fail to help their members at a time when they need their organization the most.

This case study points out at how organization should improve their peripheral vision by expanding from a traditional, narrow risk management approach to a strategic risk management capabilities

Outline

1.) Case study follows the ambitious growth plan and the cultural change that Sunbeam Credit Union encountered from 2005 to 2007.

2.) The impact of the subprime crisis, the subsequent financial meltdown and the implosion of the local economy.

3.) Relaying on technology investments and a complete restructuring of the organization, Sunbeam Credit Union expected a significant grow of their assets in a five-year period.

4.) Sunbeam Credit Union’s plan that worked well until the financial crisis in the form of subprime losses, financial disruption and greatest economical contraction since the Great Depression of the United States.

Florida History

Population: 528,542.

In 1920 economic prosperity stimulated tourism to Florida.(land boom)

Brief period of intense development.

In 1926 & 1928 devastating hurricanes, stock market crash and the Great Depression. ( halted real estate)

After WW II Florida’s climate, growing availability of air conditions and low cost of living. (made it haven)

History Migration increased (Midwest and Northeast

sharply).

Real estate agents claimed city is about to become “ Manhattan in the sun”.

Manmade disasters of real estate deal gone wrong and natural disasters (Hurricanes) became annual event.

Impact of devastation is different but loss of lives is always there.

Property and casualty insurance key issue in the state.

Credit Union in US

In early 1900s, the credit unions emerged in US.

Built on the European experience

Edwards Filene, a philanthropic fathers of US credit union system

Saw Credit unions as a powerful tool against the dangers of communism and labor unrest.

Credit union crisis In US Economic crisis effected small

businesses and rural farmers. (Urban lenders deemed them as too risky buyers)

Group of individual merchants, artisans and farmers pooled together resources and made loans. (Neighbors and coworkers)

This helped ease credit freeze and provide capital in rural areas.

Current Credit Unions on US Credit unions in US remain not- for- profit

financial cooperatives.

No federal taxes apply to them

Members of cooperative elect board of credit union. ( 7-9 members)

Until recent boards were mainly made up of middle aged white males

Has changed now Credit Union boards are more divergent.

The Crash

During real estate boom Florida residents purchased rental homes and multifamily units.

Many people kept primary home as collateral to secure rental units. ( as a whole or part of down payment)

In June 2005, Sunbeam Credit Union had 1,600 properties in their listing, in 2006 they had 4,000 and by 2007 they had 8,000.

The Crash

The real estate agents always said “Real estate can only go up”.

As a result many skilled workers rented their dwellings.

Irregular incomes, poor credit records, lack of down payment to purchase restricted these families from attaining a key piece of the American Dream.

Effects of the crash Collapse of development and construction at

the start of the housing crisis had some devastating effects.

An exodus of skilled tradesman took place as they left for other states in pursuit of work.

The fallout led to:- Housing vacancies- Downsized classrooms

- Reduced federal support for school and social programs. Owners could not pay for multiple mortgages

since Unemployment increased to 13% Real Estate prices dropped by 60%

Three waves of Credit Union First wave: (1900- 1950)

Credit unions were mainly volunteer operated.

Self organizing entities served the “excluded class”, people who were ignored by the financial institutions.

Second Wave

(1950- 1980)

The credit union model became complex after relaxation of regulatory restrictions in the 1970s.

This led to appointment of paid managers.

During this period leading credit unions developed into full service financial institutions.

Third Wave (1980 - present)

Currently the system comprises a variety of institutions.

Offer a wide range of financial products and services.

Many credit unions have become leading financial institutions due to their improved operational efficiencies.

Marketing, data mining, customer research, and product innovation have become part of the initiatives for competitive credit unions.

Credit union structure

7,300 individual comprises the credit union system.

They have 2 groups:- Federal charter - State chartered

Most are federally insured

160 credit unions carry individual insurance, combined assets of all credit unions total $896 billion.

The top 165 credit unions account for almost half of the total assets held by all 7,300 credit unions.

Credit Union Structure

The system remains highly fragmented, with considerable penetration in some markets(car loans, mortgages).

Real estate and auto loans make up the bulk of the loans of credit unions.

Larger credit union offer a broad portfolio of products and services.( investment advice and trust service)

Financial Crisis Impact on Credit Union

The financial crisis had a impact on credit union in several unions.

Some credit union involved with speculative real estate portfolio that which went sour.

Ended up in receivership and eventually went bankrupt.

In sand states the decline in housing values wreaked havoc on the balance sheets of many credit unions.

Financial Crisis Impact on Credit Union

Credit union system saw a decline in its strong net worth ratio from 11.4% to 10%.

ROA had a steady decline in the past years from 1% to 0.3%.

For many credit unions the corporate system remains the only source of capital.

Without the corporate system smaller credit unions would depend on the commercial banks.

Credit unions did not receive any federal support funds

Unemployment & Delinquency Rate

In a recent study on how banks fared vs. credit union in depressed market showed that:

- Credit unions have significantly lower delinquencies and charges offs than banks.

The risk averse – Where board members do

not profit from risk taking,- Risk reputational loss in their community, is one of the key reasons why the credit union delinquency rate is lower than the banking system.

Simple Roots

A group of teachers started the credit unions as volunteers by collecting money.

The effort is to help the educational community overtime .

Credit union used a more direct communication style that helped the transition from a single Field of membership (FOM) to a community charter.

Success FactorsEffectiveness to the

credit union Technology would speed up routine

transactions. Bring greater efficiencies and focus of the credit union on accuracy, speed and service

People were also a key to the credit union.

Taking care of the employees by creating superior work conditions would increase the effectiveness and efficiency and will lead to increased performance.

Rapid Growth

Credit union grew around $250M in assets in 2005.

Success drivers:-Strong performance of car loans (both new and used) and, real estate loans with growing number of secondary and equity loans.

-The credit union grew its loan service and became one of the dominant players in the market

Competitive Advantage

Over 600 businesses provided the basis for a growing Members Business Lending (MBL) service.

Local roots was a competitive advantage over mega-banks .

It Provided local knowledge that made loan decisions easier for Sunbeam`s loans officers.

Reorganizing for the FutureMethods & Models

Growth created economies of scale, improved earrings, and reduced costs and fund the next wave of technology.

Alternative models were found by Ron, this model will centralize services and will offer technology channels .

The new structure will provide costs savings and improve services

Steps of ImplementationMethods for Restructuring

Ron announced that positions at the credit union were terminated.

New job descriptions would be posted on the same day and every employee can apply.

Use of the “BUS” concept- “Get the right people on the bus, get the people in the right seat and those left standing must get off the bus”

Pros & Cons Pros:

-Robust implementation and restructuring

-Merit and accountability , not seniority would determine bonuses and promotions

-Certification accomplished in one year instead of two with the new technology based remote branch delivery model (Because it needed adequate training)

Cons:

-Longtime employees who worked after 30years felt should not go through the process. (Sense of entitlement)

Shape of Sunbeam`s credit unionRadical makeover

Reduction in operating expenses will change earnings picture.

Income from interest spreads was driven largely by market forces.

Necessity for senior leadership team to enhance the narrow risk focus (Interest risk, Investment risk, and liquidity risk), that will have an impact of member service level.

By having good managerial processes and systems , Ron reduced the risk associate with any transformative culture change.

ResultsOct 2007

In 2007, the credit union received an award for the state of Florida.

The award was by recognition of its efforts to transform itself into innovation work- place ready for the future.

Some long term employees are willing to leave the credit union.

New employees are embracing the technology-centric system.

Rise of the problem

Rise in the Florida housing market due to: Low federal funds rate Beneficial mortgage rates for home buyers Easy to obtain loans even for first time home

buyers with suspect credit ratings

The risk of subprime lending (Loan to people that have difficulty maintaining their repayment schedule) was reduced by variety of complex products intended to spread the risk and minimize the downside.

Frozen Market In 2007 ratings for subprime instruments

dropped, cost of insurance for these instruments increased greatly and the market

stopped

The freeze brought down market giants

The crisis had a spillover effect from subprime mortgages to global finance. The whole world

was facing a depression. Stats:- 2009 Florida became a net exporter of people- Unemployment: 12.9%

Pressure In the negative economic environment, the

credit union had to end the indirect lending programs as well as sell its credit cards portfolio.

The net worth was being pulled down by the rapid increase in delinquency and the increase in provisions for loan losses.

These steps were accelerated by the growing pressure from increasingly anxious regulators.

Reductions The regulators made the credit union stop the loan

programs that would developed specifically to serve the underserved populations

However this intervention resulted in further revenue lost

The credit union had to cut employees benefits as well as employees.

Sunbeam found itself unable to offer a net worth restoration plan that was acceptable to the regulatory agencies.

Safe Harbor

Sunbeam`s credit union will draw up 10 criteria that will inform our decision process. By bringing an independent consultant.

The consultant after an in depth study of all the mortgage and other loans portfolios concluded that:

Deep cuts in staff and branches were needed Make the company smaller during the difficult

times Be the first credit union to expand when the

difficult times would be over He was optimistic overall

Sunbeam Financials 2004–2006

Sunbeam Financials 2007–2009

Relation to CRM

The credit union could not recognize uncertain lenders from certain ones.

Delinquency rate is low because the risk in banks is higher and rate of return higher-

- In credit unions the risk low, so the rate of return is lower.

It is more risky for employees, since they are putting their own money.

Four Scenarios Created

• Doomsville presented a dark scenario with a collapsing economy and the credit union as a victim of a prolonged and wide-scale downturn.

• Grey Flannel spoke of bad times for Florida but thriving conditions for the credit union. This world would most likely bring the credit union back to the world of the old Savings and Loans.

• The Survivor scenario portrayed a weak Florida economy and a decline of traditional credit unions as they failed to compete in a hypercompetitive market.

• A Wonderful Life showed thriving credit unions with a growing profile in a strong regional economy.

Strategy/Structure Strategy- With the use of technology, sales and service culture has rapid growth in loans.

Structure- Branches have to become sales centersand develop the loan portfolio.

-Become a flat matrix organizational model

-More discipline for less errors.

Sunbeam’s Risk Matrix

Conclusion Case study showed the unfortunate downfall of a once

successful financial institution with a proud heritage.  

Sunbeam Credit Union from Florida did not engage in subprime lending, thereby avoiding some of the financial crisis era’s most obvious risks.

Breakdown of the construction industry and the following emigration of construction workers, along with the loss of their jobs had a significant impact to Sunbeam Credit Union.

Before the financial crisis, Sunbeam Credit Union slashed their expenses, adopted new technology and reorganized their employees in an attempt to grow from $250 million in assets to $700M in a five-year period.

RecommendationsWith the use of Survivor

1.Consider alternative agreement with a corporation careful with issuing credit.

2. Develop tax strategies, with competent professional advice.

3. More use of technology to gain efficiency in financial data will lead to faster transactions.

4. Alternative staffing models, i.e., outsourcing call center as talent

is scarce.

5. Being cautious with lending money.