Publisher’s Note: We all lost a good friend with the recent passing of Rex Johnson, a true giant in the credit union industry! The readers of Credit Union BUSINESS News were recipients of Rex’s knowledge and experience through a series of articles on Lending that he contributed to CUB a few years ago. I admired them because every one of them offered solutions to very real challenges that many lenders face. As a tribute to Rex, and the company he founded, LSCI, I will share with you some of them in the weeks again, beginning with my personal favorite, “How to Go ‘All In’ “. I hope enjoy reading it as much as I did. Tim O’Hara
How to Go “All In”
Written by Rex Johnson in May, 2016
We agreed to work with CU BUSINESS News because of their commitment to excellence. In my last article I promised to reveal a formula for growth and profitability that really works because I wanted to recognize what Elga Credit Union has accomplished and show you how this formula enabled two credit unions to perform well over the last few years in an extremely tough economic environment. Both credit unions are very, very successful and have experienced above average earnings and growth. What do these two credit unions have in common?
Let’s look at Elga Credit Union first. As of June 2014, Elga was the number one credit union in its peer group with assets of $377 million. In June 2010, Elga had assets of $260 million, which means their assets grew $117 million in four years, a 45 percent increase. Their loans grew $122 million or 63 percent over that same timeframe and their loans grew faster than assets. When you grow loans, everything else grows.
To recap, Elga’s results are:
- Asset growth in 4 years = 45%
- Loan growth in 4 years = 63%
The second credit union was in the top 85 percent of its peer group and also delivered great results. It continues to climb very fast and I have no doubt that they will be in the top 95 percent of their peer group by the end of this or early next year. Here is their growth, or Return on Assets (ROA), over the last four years:
- December 2010 Net worth = .23% ROA
- December 2011 Net worth = .84% ROA
- December 2012 Net worth = 1.19% ROA
- December 2013 Net worth = 1.25% ROA
- June 2014 Net worth = 1.51% ROA
This shows consistent growth over four years in a challenging environment. Like Elga, the second credit union went “all in” to increase their earnings. Let’s look at what these two credit unions have in common through June 2014:
|Loan Growth||Loan Yield||ROA||Fee & Other Income|
|Credit Union in Southeast||11.76%||6.09%||1.51%||2.52%|
Do their results look similar? How does this compare to their peers as a percentage?
|Loan Growth||Loan Yield||ROA||Fee & Other Income|
|Credit Union in Southeast||11.76%||6.09%||1.51%||2.52%|
What do these comparisons tell us? That both credit unions are focused on:
- Loan Growth (Goal is over 10%)
- Loan Yield (Goal is 7.5% after charge offs)
- Fee and Other Income (Goal is 2.5% plus)
- Earnings (Goal is 1.5% plus)
Are they hitting their targets? The answer is yes—except for loan yield—and they are doing far better than their peer groups. Of course, by increasing their yield they can substantially increase their earnings. They were both very successful in increasing their non-interest income—also known as fee and other income—as well.
How did they do it? By going “all in”! They specialize in:
- Serving all of their members
- Taking risk
- Training their employees
Credit unions that continually focus on training get the best results. Remember, the cost of training is not what it costs you to train your employees, but what it costs you when you don’t. Trying to be very aggressive without training staff will cost you a lot of money. CUs that are well staffed with well-trained employees are in a much better position to take on more risk and increase their yield and helps them better serve their members.
Does taking on more risk suggest you will have higher delinquencies and charge offs? Yes it does, but not taking that risk will cost you far more in the long run.
Let’s look at our examples again:
|Credit Union in Southeast||.97%||.85%||1.51%|
Credit unions that take the most risk have slightly higher delinquencies and charge offs than their peers. On average, delinquencies were 63 percent higher with Elga CU and 18 percent higher with the credit union in the southeast. Charge offs were 5 percent higher with Elga CU and 63 percent with the credit union in the southeast. Still, both credit unions had very acceptable delinquencies and charge offs.
More importantly, even though the two credit unions had somewhat higher charge offs and delinquencies, they made a lot more money for their shareholders and show earnings that are three to four times that of their peer group. How do their earnings compare to those of their peer groups?
Elga’s earnings were 294 percent higher, which is not a typo. That means they realized an income of 2.01 percent, nearly four times higher than the 0.51 percent of their low-risk taking peer group.
The credit union in the southeast earned 1.51 percent versus 83 percent or an increase of 82 percent—almost double that of its peer group.
This shows that any losses in write offs are more than offset by increased earnings, which should tell you that not taking risk could cost you a lot of money and good members. Members will never forget that you were not there when they needed you most, especially those who have always paid back previous loans.
By taking more risk and giving more money back to shareholders aren’t these two credit unions better serving their members? Aren’t they doing their job? Examiners often prefer low delinquencies and charge offs—and so do I—but I also believe that CUs have an obligation to serve all of its members not just the ones that don’t need help. Plus, I like giving more money back to members.
I have always tried to encourage CUs to serve all of their members, hoping they will reach out to the “D” and “E” paper members the same way they do the “A” and “A+” paper members. Most credit union members are good, hardworking and honest people. Occasionally, they hiccup and make mistakes; sometimes it’s their fault and sometimes it’s not. If, with all of our training, we can’t come up with ways to help our members, then shame on us. If we don’t train our employees then shame on us. If we are not spending the time we need with our members, then shame on us. Why do we continue saying no to our members? Forcing them to seek financial help elsewhere means losing lifetime memberships.
Do your lenders believe that all they have to do to make loan decisions is look at credit bureau report risk scores and loan applications that might not be complete? Is it possible to make the right decision with just that information? Might decision making be easier and more thorough if they talk to members? Something has gone terribly wrong with the process when loan officers believe that quickly scanning a loan application and credit report is all they need to make a quick decision before moving on to the next application.
So what is the answer? Here’s what I would do to start getting great results:
“Go All In”
Now is the time and here is how you get started:
- Include your CU’s statistics in the Ratio Analysis checklist provided in this article. Compare your numbers to both Elga CU and the credit union in the southeast. Note: Elga CU is in the 100M-$500M category and the credit union in the southeast is in the $500M plus category.
- Show the results to your Board of Directors and your staff. Include those areas where you out perform these two credit unions as well as areas where you fall behind. Get the Board of Directors and Senior Management team to agree that they are ready and willing to commit to making a change.
- Put together a game plan. You can do it yourself, use our services or someone else provided they have a proven track record. Please don’t wait: it is important that you make a commitment now. Doing nothing is the biggest weakness, so get started now. I’m so confident that you’ll succeed, that we will help you even if it is not in your budget for this year. You can pay us next year.
- Let the examiners know what changes you have made when they come in. Show them you are ready; tell them that you are training your employees and that management and the Board of Directors are “all in”. Show the examiners you are making changes based on:
- How you compare to credit unions that are getting great results and tell the examiners you are benchmarking against those high performing credit unions.
- How you monitor and track everything you do and tell them you will continue to do so
- The results you are getting: The increases in Loan Growth and Loan Yield, what is happening to earnings, etc.
- Train your employees. Use internal and external training resources. You cannot do this without making a commitment to training and that training should never stop. Include all new and existing employees, even employees who have been around a long time.
- Set challenging goals and monitor the results. Every department and branch should be assigned challenging goals. Standards are how you expect every employee to perform; goals ask employees to exceed standards. Set standards for everyone.
- Reward accomplishment. Give employees the opportunity to make more money, provided they produce the results you want. Establish both individual and team goals and have management monitor individual performance to make sure every employee is toeing the line.
- Keep both employees and members informed. Let them know where you are heading. Make sure your members know you are in the loan business, that you have money to lend and have solutions for their financial problems. You want to motivate employees and members. Your members deserve to talk to highly trained and motivated employees who really care.
- Marketing, both internal and external, is critical. Get creative with marketing. Market as heavily to “D” and “E” paper members as you do to “A+” and “A” paper members.
- Have fun. If your employees are not having fun, they need to find a new job. If senior management isn’t involved and in the office all day every day, they need to find a new job. If every employee is not “all in” they need to find another job. This shouldn’t be an option: that’s what “all in” is about. Nothing great ever happens without passion, nothing; remember that. You’ve got the best job in the world and it’s called people helping people. Tell your competition to look out; it’s a new day! Why will it work? Because you are “all in”.
Again, we encourage you to measure your results against the two credit unions that went “all in”. Both credit unions are located in different parts of the country. They had to make changes. They saw change as an opportunity, not as more work. Their strategies were similar. Their results are outstanding and they continue to get better every year. All they had to do was implement “all in” and stay committed. They agreed that they wanted to be the “best of the best”. So can you!