One of the best things credit unions have going for them is knowing what results they are likely to realize if they continue to do what they have always done. And credit unions get lots of unsolicited advice telling them what they should be doing. I have given them lots of advice over the years, too, so I should know.
Of course, there’s nothing wrong with asking for advice; I’ve looked for advice, too. I will occasionally take a golf lesson, which never seems to help, but I continue taking random lessons because I’m desperate to improve my game. Maybe someday something will click and my swing will magically improve.
The truth is there are credit unions that desperately need help. Nothing they’ve tried has worked and they are ready to listen to anyone, try anything. They operate from a sense of urgency and feel they must do something—anything—NOW! And it seems that everyone is ready to offer advice, even when they haven’t asked.
Who is offering unsolicited advice?
- Examiners give unsolicited advice. There are regulations we must follow of course, but most of the advice examiners offer has nothing to do with regulations; it’s simply one examiner’s best suggestion. Should you listen to those suggestions simply to maintain good relationships with the examiner?
- Board Members and other executives who go to conferences. Attendees often come back with solutions that some “expert” presented at a conference, and, well, if it worked for that other credit union, I bet it will work for us, too. You know you’ve got a real problem if several Board Members hear the same message and they all agree it’s the magic bullet solution. Chances are, change will—and should—take place, however it doesn’t always work. Why? Often because there was no buy-in from the management team or employees. They were never sold on the idea and didn’t believe it would work from the day the changes were announced.
- Employees who’ve attended Lending Solution schools. (This is one area in which I have a lot of experience!) They get really excited about everything they’ve learned; yet many of them tell me that almost none of it will ever be tried at their credit union. “They will never do this or let us do that.” “We would sure like to do these things, but we were told before coming to school that we shouldn’t expect management to agree to implement everything.” One example that I hear quite a lot has to do with incentives: “Offering incentives might really improve results, but we will never be able to try it out and see if it works.”
So what’s the answer? I believe it’s something called “All In”, which means getting everybody at the Credit Union—Board Members, CEO’s, senior and middle management and all employees—to buy into your ideas, support your cause and believe that what they do matters. Those organizations that go “All In” usually get great results.
An example of this is an employee who comes up with a great idea and brings it their boss. The boss listens and, before offering any explanation and giving it little thought, quickly answers, “We are not going to do this; we have tried it before.” That supervisor may not realize how hard the employee worked on putting the plan together or that he didn’t deserve having his idea so cursorily denied. Nor did he bother to consider that his thoughtless response meant this was probably the last initiative he would see coming from that employee.
Would the idea have worked? We don’t know, but chances are that, because it came from an employee and not from management, it had a better chance of flying. The employee would have done everything possible to make it work, including energizing his co-workers; he probably would have gotten their total buy in. Credit unions have to understand that total buy in or as we say “All In” is one of the keys to successfully managing change.
So how does a credit union get started on an “All In” approach? Here are the steps you need to take:
Start with the NCUA’s financial performance ratios, better known as “FPRs”. You can go back five years and look at each year’s trends such as:
- Charge Offs
- Return on Assets (ROA)
- Loan Growth
- Loan Yield
- Loan Income
- Other Income
- Makeup of the loan portfolio broken down into:
- Mortgage loans (low yield)
- Unsecured loans (high yield)
- Car loans (low yield to A & A+ members)
- Asset Growth
- Share Growth
- Membership Growth
- Earnings after Expenses
- Average Loan Balance
- Average Share Balance
Note: Credit unions that usually have the lowest loan balance and share balance usually make the most money because they are serving the underserved.
Once you have looked at these line items, ask yourself if your trends are going up or coming down.
Once you have determined the last five year’s trends, look at:
- Whether your earnings are going up or down
- What is happening with loan growth: many credit unions are growing loans, yet generating less loan income.
- Look to see if loan yield has dropped dramatically: loan yield is far more important than loan growth.
- Examine delinquencies and charge offs: Are they going up or down?
- Determine if your CU has been rejecting more loans, taking less risk and more focused on getting A and A+ members very low rate car loans from indirect lenders.
Examine your current Cost of Funds. Are they less than 0.50 percent or below 0.25 percent? Are your members happy? With such small returns, how much longer do you think they will keep their money at your CU?
Review income gains and where it is coming from:
- Are there big savings in your Provisions for Loan Loss? Most credit unions have extremely low delinquencies and charge offs. They were able to increase their earnings by not having to fund charge offs due to low delinquencies. That is not going to happen as we go forward.
- Are there big savings in your Cost of Funds? As members want more, that will most likely not continue either.
- Are you still offering excellent service with reduced staff? If you plan on making more loans and open more accounts you are going to have to start hiring more people. Member service in credit unions is not what it should be.
Ask yourself how important loan growth and loan yield are to reaching your goals. Can you continue to operate the way you have been? Would maintaining the status quo sustain your business? I believe that without loan growth of at least 10 percent per year and a loan yield of at least 07.5 percent per year after charge offs, you are likely to have problems moving forward.
I know that the last eight years have been extremely difficult for credit unions and that they did what they thought they had to do in order to continue serving their members. A lot of past CU problems came from mortgage loans and the huge number of foreclosures, short sales, deeds in lieu, etc. The first advice examiners gave CUs was to tighten up, rewrite policies, lower the amount they loan to members, cut expenses, freeze salaries, etc. Putting money into the insurance fund took away a lot of CU earnings. Many credit unions cut back training. Boards of Directors were told what they could or could not do by examiners. Credit unions had to sign letters of understanding and provide examiners with a lot of new reports. And new rules were coming in faster than ever. Corporate credit unions were being merged into other corporates. We were all concerned and many believed the sky was falling.
So, what was wrong with this strategy? Sam Walton, who founded Walmart, was fond of saying, “When everyone is moving in the same direction, the real opportunity is moving in exactly the opposite direction.” I think it’s great advice and Sam Walton was one of the best businessmen that ever lived. Unfortunately, most people don’t follow his advice. They want examiners to tell them what they need to do: turn the faucet down or off. And who paid the price for all this? Credit union members—also known as the CU’s owners—that’s who. Members were being turned down like they had never been turned down before. Everyone who makes loans, it seemed, had a new box they lived by and, unfortunately, the new box was a lot smaller than the old box. Members who had always paid their credit union were now being denied. Why?
- Perhaps they had a delinquent loan somewhere, not necessarily with the credit union, but somewhere.
- Their debt to income ratio was too high. Credit unions refused to count income that was not verifiable even when they knew it existed.
- Their Fair Isaac score was too low, why?
- They had some small collections such as medical bills, student loans, etc.
- They lost their home because they lost their job. It didn’t matter that they also paid everybody and were now back to work.
- They had to go bankrupt because of illness in the family, or some other major unexpected expense.
There were lots of reasons and I could go on and on, however one factor most members had in common was that they continued to pay their credit union. But because of their lower Fair Isaac score, they didn’t have a chance. Remember, they were not behind in payments to their credit union.
Members won’t forget that the door was closed when they most needed help and will remember being helped when they were most in need. If you turn down someone who never missed a payment, they may never forgive you.
It’s time to go “All In” and get back to what we do best.
The loan interview provides you with a lot of opportunities. Are employees simply collecting data and passing it along to someone else for decision-making, or are they taking advantage of every business opportunity? Employees should be encouraged to conduct a quality interview every time they sit down with a member to discuss any type of loan and any employee who fills out a loan application for a member should have an ownership stake in the decision-making process. You do not want employees taking loan applications without telling you how they recommend proceeding.
Focus on the following to get started serving the underserved and increasing your CU’s loan growth and loan yield so you can continue offering members low rates and employees competitive salaries:
- Interviewing Skills
Teach your employees how to take and analyze loan applications. You will never make as many loans as you should if the employees taking the applications are only asking the questions written down on the form. Of course, simply making sure employees fill out every loan applications completely would be a huge improvement and would make the decision maker’s job much easier.
Make sure you are spending enough time with members who come in to apply for a loan. Everyone is in a hurry and wants to get members in and out as quickly as possible, but don’t be too quick to say yes or no. The loan process is not a horse race: Remember, you’re dealing with your members and should be coming up with solutions they might not have considered themselves.
- Questions you should be asking members
- What motivated them to come in and ask for a loan? How they answer is critical and should be the first thing you focus on.
- Why did they come in today to request a loan?
- Why did they choose your CU?
- How did they pick this loan amount?
- Do they like their job?
- Is it likely the job will continue? Is the employer laying people off?
- If they have student loans, where did they go to college? Did they graduate? Will they be making more money?
- What is the condition of their car? How many miles does it have on it?
- If they are trading in a car they purchased 6 months ago, why are they trading it in after just six months?
- Did they put money down when they purchased the car they are now trading in? Are they upside down?
- Are they putting any money down on the car they are buying?
- Do they own their home? Do they have a mortgage, if so did they make a down payment?
- Has their house gone up or down in value?
- Do they have equity in their house?
- Can you pay off their house or car and save them money?
- Where is their checking and savings account if not with you? Would they move it over to your CU? Are they willing to set up direct deposit and give you all their business?
- What questions not on the application should you be asking, i.e., did they recently move?
- Closing Loans
Ever since my training days at Household Finance, I’ve never forgotten that “a loan well closed is half collected”. Understand that most members will make their payments on time and a small percentage of members who have missed payments with other lenders will also test you. If they’ve gotten away with missing a payment before, they will likely try it at your CU.
However, the promise of future credit is very important. If members with delinquent loan payments know up front that they will be able to get future credit if they pay on time, they will probably will, which means you’ll be happy and so will they. If you are lucky enough to have had more than one child, you quickly learned that they are not the same. And neither are your members. When you close a loan, you will have to spend twice as much time on marginal members than members with perfect credit. Care enough to get involved. Do you or does anyone in your credit union ever observe your employees closing loans? Are loans for “A+” members closed the same way as loans for “E” paper members?
I will close this session by telling you the following:
- We control our destiny.
- Leave your ego at the door; let your numbers speak for themselves.
- Make a commitment to be the best of the best, not just good.
Educate everyone—Board Members, CEO’s and staff—by letting them know that your CU’s goal is to go “All In”. You will love the results. Change is what you must be all about; not making changes should scare you most.
In our next article we will give you real examples of credit unions that made big changes, who went “All In” and got incredible results. One credit union we work with went from having a negative income of $5,000,000 to a positive income of $7,000,000 simply by retraining staff and learning to take appropriate risk. Their loan to share is now 96 percent, delinquency has been reduced by 50 percent and charge offs have been reduced by 75 percent. They’ve increased their capital ratio from the 07.7 percent range to the 10 percent range in five years and their assets have grown 35 percent in three years. Their 2013 ROA exceeded two percent after all expenses.
Perhaps what is most interesting is that the CU serves members who live in an area with high unemployment and a higher than average foreclosure rate, yet it managed to overcome every obstacle. Even better, they helped create a lot of jobs and pay for 75 percent of their employee’s undergraduate and graduate degrees. They have virtually no staff turnover and serve the underserved well.
Tune in to our next article where we will give you the formula they used to turn their business around, a formula you can easily duplicate.
CU BUSINESS magazine prides itself on being the best of the best and wants to provide you with ideas that work and that you can easily adopt. Remember: Every day is a good day to make loans; let your members know. Be aggressive. Approve 90 percent or more of your loan requests; let us show you how.
A. Rex Johnson is the Founder/Owner of Lending Solutions Consulting, Inc. (LSCI)