Bridging the Great Divide requires Calculated Risk Taking

Each quarter as NCUA releases its guidance on the state of the credit union industry we continue to see the gap widen between the thriving and the dying. The “thriving” are those growing, profitable credit unions who consistently achieve desirable results while continuing to transform themselves into viable financial cooperatives for the foreseeable future. As for the “dying”, well let’s just say the recent past hasn’t been kind to them and their future isn’t any brighter. Most reasonable people will say the biggest differentiator between the two classes is size – but just how did the “thriving” get there? My point is that the real difference maker is they’ve become adept at being calculated risk-takers, or put another way – more effective risk managers.

So where are the most significant structural differences? In Capital Hoarding, Lending Attitudes & Long Term Perspective

© Copyright 2010 CorbisCorporation

Capital Hoarding – The Dying cling to their capital under the mistaken belief it will protect them from extinction. NCUA’s June 30, 2014 Summary of Trends by Asset Group shows that the smallest peer group (< $10 million) in assets have a net worth ratio of 36% higher than the fastest growing & most profitable institutions (assets > $500 million). While a shrinking asset base inflates the ratio I believe the underlying lesson is that you absolutely must continue to invest revenue generated back into the credit union in the form of people, products, systems and facilities in order to maintain relevance. The former (people) is not only your greatest expense but can truly be your most significant differentiator. The productivity ratio (as defined by total revenue/compensation & benefits) at the higher performers is 46% greater than those struggling or in decline. They create $3.20 of revenue for every dollar spent on staff contrasted with $2.19. It’s not how many people but what they’re focused on. Do the tasks typically performed add value or emulate current electronic delivery channel alternatives? Leaders of the successful have skillfully redeployed the earnings created into new products and services that meet the needs of their members, and just as importantly created additional revenue streams.

Lending is an Attitude That Your Actions Support

Perhaps the widest gulf in the comparison between the haves and the have not’s is reflected in the loan to share ratio. The rising credit unions have managed to loan out nearly 20% more of their members share dollars to meet the borrowing needs of others in their cooperative. They clearly understand the favorable trade-off that by loaning an additional dollar out of each five on deposit to assist their members they can accept lower loan yields and still generate a higher return than if the money resides in an investment. Charge-off levels are virtually equal and delinquency is actually higher at those credit unions who “struggle” to make loans. © Copyright 2010 CorbisCorporation

My first job at a credit union over 20 years ago was to reverse the decline in loan balances outstanding. Several years earlier the initial sponsor had closed the doors on their manufacturing facility and moved thousands of jobs to a neighboring state which resulted in the credit union severely restricting the availability of credit. In the ensuing years the credit union had done an excellent job of diversifying and growing its membership in the community but failed to re-open the lending “faucet”. Simply put they had become expert at finding ways to deny loans instead of adept in looking for ways to get them approved. It required a complete change of perspective (or attitude) but literally within months the trend was reversed. While some of the members had long memories the introduction of new programs (at that time) like indirect lending and first mortgage lending provided us with a whole new array of borrowers. Some of the most successful “small” credit unions I know of are quite skillful at risk-based consumer lending creating loan yields that would be the envy of many larger organizations. At the heart of this activity is an attitude or desire to find ways to make loans that are still significantly cheaper to the member than those provided by non-credit union competition.

Long Term Perspective

© Copyright 2009 Corbis CorporationAnother startling difference can be found in the percentage of long term assets held by the flourishing. Fully one-fourth more of their balance sheet is being deployed today in ways that create greater revenue and help build the required infrastructure, while the fading continue to equate rising rates with a falling sky. My point is this –credit unions that have strategically chosen to put their assets to work over a longer term are planning to be around for the duration and managing the entirety of the resources they’ve been entrusted with in a manner that suggests greater vision or comprehension – not a lack of it. What’s the lost opportunity cost over the last five years for credit unions who have continued to stay short, refusing to lower loan rates to record lows or selling off loans that yielded far in excess of their investments in fear of what might happen should rates rise in the short term? Could the revenue that would have been generated been used to invest in new products and services, additional income streams that would potentially offset the downside and more importantly meet the demands of their membership?

The risk of doing nothing

We’re in the risk management business friends, not risk avoidance. If you think playing it safe is going to mean survival think again – you need to be taking calculated risks, developing relationships and alliances that make you in demand; not putting up walls that will isolate you further from those who need your services the most. The cost of doing nothing could mean the end of your credit union, while taking calculated risks may increase your exposure the premise is that you understand and limit those risks to be non-fatal. If you’re ready to move forward in bridging the gap and join the ranks of the thriving but don’t feel comfortable in being able to calculate the risks don’t feel like you need to go it alone – we’re here to help.


About cu succeed llc

C U succeed, llc provides strategic advisory and management consulting services to assist mid-sized financial institutions succeed in today’s most challenging business climate. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - It is the conception of its founder, Jeff Meyer, who left a highly successful career as CEO of 3Rivers Federal Credit Union (Fort Wayne, IN) to establish the firm. For over two decades Jeff was a principal leader and chief instigator in establishing 3Rivers reputation as one of the most progressive and well respected financial institutions in the Midwest. During his tenure the credit union grew over 600% to $740 million in assets in 2012. 3Rivers consistently remained a safe, sound and highly profitable institution during all of this time, yet of most importance to Jeff was the culture he was able to create among both the membership and the team members (employees). It was as a result of Jeff’s strategic vision and relentless focus on achieving results that such accomplishments were achieved. By consistently questioning and challenging the status quo he was able to develop an environment where individual development was expected, change was embraced and profitable growth was a requirement. Through being able to identify & gather members’ needs and meeting them with simple, yet effective solutions the organization was able to create unique, positive member experiences. Now you can put Jeff’s extensive experience, understanding of the industry and unique perspective to work for you.
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