For most credit unions, it’s a foregone conclusion that growth is a goal. By and large, this makes sense: A financial organization cannot remain stagnant over time and expect to thrive. Growing larger makes a CU able to serve more of its SEG or its community. And there are some economies of scale that make it more desirable, in general, for a CU to be larger.
“Scale, in my view, is a big deal for CUs,” says Ted Thames, CCE, senior director at Scottsdale, Ariz.-based Cornerstone Advisors, Inc., a CUES Supplier member and CUES strategic partner. “The greater scale you have, the better you can deliver value to members and create new value, because your overhead costs are handled by a much larger volume.” Thames says on average, larger credit unions are better able to provide services, such as wider branch expansion and remote deposit services, to their members than are their smaller brethren.
Right now, growth is particularly on the minds of credit union managers, because they are being presented with a rare opportunity for the acquisition of new members. Banks have, in Thames’s rather restrained estimation, “proven themselves not really worthy of being trusted.” Even with the most minimal marketing, credit unions are attracting new members simply because consumers see CUs as a better value and a more honest, member-centered proposition.
If CUs do their jobs right, that consumer trust and belief will be richly rewarded.
But frustratingly, not all credit unions are able to take advantage of this growth-positive climate. Thames points out that because of the economy, margins for credit unions are low and most consumers are less likely than usual to borrow. As a result, earnings are harder to come by than they have been in the past.
It’s a cruel conundrum. At a time when consumers are itching to deposit their funds in a credit union, many credit unions are not in a position to start new savings accounts. But it’s not an insoluble problem. The solution is to grow in ways that don’t inflate the balance sheet. Growth should not be measured merely by asset size and membership; it should also be measured by loan-to-deposit ratio.
In short, that means lending and non-interest income. When credit unions attract new
members, they should try to create a well-rounded relationship that may include—depending
on the member’s needs—a checking account with a debit card, a credit card, an automobile loan, a small business loan, or a mortgage loan. To continue growing, a credit union may also need to re-jigger its relationship with existing members.
“Most of my clients are either regulating their deposit pricing to discourage growth, or [they are] conducting telephone campaigns with their larger depositors, talking about wealth management opportunities,” says Thames. “They’re trying to get them into assets that are off-balance-sheet but still benefit the members, through their broker-dealers and their wealth management partnerships.”
In short, CU growth strategies are as unique as the institutions that make up the movement. In laying out their goals and benchmarks for membership, assets and ratios, credit unions are each finding their own way.
Case Study: Mission FCU
When Debra Schwartz became president/CEO of $2.3 billion/158,700-member Mission Federal Credit Union, San Diego, she knew from the start that the credit union was out of balance.
“It was pretty clear that we had a lot of employees for a credit union our size, both in terms of number of members and assets and deposits,” she recalls. “So there’s a couple ways to fix that, and the more pleasant one is to increase your membership growth.”
Schwartz knew the credit union had to grow mindfully. She’s a former CFO, so she measures every conceivable metric for every branch, employee and product type. She and her team set goals for all the CU’s branches for loan originations, for different types of loans, for new credit cards, and for cross-sell averages.
But she also didn’t want to put the cart before the horse. What the CU needed first and foremost was growth to justify its payroll.
“Our first phase was just adding new members,” she says. “I told my board, ‘We need to get more bodies in here. We need more members. And then let’s worry about making sure that they’re profitable.’ I had faith in my branches, I have faith in our processes, I have faith in our training and, maybe even more importantly than that, I have faith in the product we’re offering—that we’re going to be able to sell products to our members to make them profitable.”
The community-chartered CU still maintains close ties to educators, who are its original field of membership. Schwartz says her CU worked closely with local schools and did community outreach to bring new members in. The credit union also refreshed its brand and changed its tag line to “Your Success is Our Bottom Line.” That statement reflects the institution’s renewed emphasis on member service. The goal is to find members a mix of products and services that will improve their lives and be in their best interest.
“For some, what’s in their best interest will be to move their credit card from a place where they’re paying 19 percent over to ours, where they’ll pay less than half of that,” she says. “Refinance their car loan, refinance their mortgage loan. Lots of alternatives. But it just depends on the member’s individual situation.”
This strategy has been working, to the tune of 5.5 to 6.5 percent growth per year. And the CU has remained profitable all the while.
But Schwartz is also adamant that not every member relationship needs to be a profitable one.
“We’re a credit union, and we appreciate that part of our charter is giving back to the community,” she says. “We have a program called ‘Mission to Save’ that targets kids’ camps and elementary schools to teach them about finance and the importance of savings. Now, clearly, those are not going to be profitable accounts, and that’s OK. We make sure that we limit those to a relatively small percentage of our total growth. We don’t want to have our growth coming from that sector, particularly. But luckily, we’re strong enough and profitable enough that we can do things like that. I really feel that sets us up for future growth, because those kids have parents. They’re going to grow up and eventually need a checking account and a car loan.”
Schwartz advises other credit unions to look at growth from two points of view: acquisition and retention. There’s no sense attracting new members if you can’t keep the ones you already have, she notes—and what makes members stick around is the relationship they have with the credit union. The right product mix is key, as is stellar member service.
The CU is maintaining a 97 percent retention rate, which Schwartz credits to its superior member service. This focus on retention helps inform Mission FCU’s growth goals for its branches.
“When we set our budget, it’s both top-down and bottom-up,” she says. “We have an idea of what we want to grow, and typically it’ll be somewhere in that 5 percent range. Then we go back to the branches and say, ‘OK, what does five percent mean for each individual branch? Well, this is a relatively new branch; maybe they can do 10 percent. This is an older branch, it’s been around for 30 years, they’re more likely going to be 3 percent.’ When you’re an older branch, you are going to have members that are going to move away, that you’re going to lose. A new branch doesn’t have that issue. So we have to take retention into account. And if they already have 7,500 members at that branch, they may not have room to double.”
This same strategy will work for most credit unions, Schwartz feels, although she admits her CU is lucky when it comes to capital constraints.
“We’re very fortunate that our capital has remained over 10 percent over these last five years in spite of all of the challenges we’ve had,” she says. “And that gives us the opportunity to invest in growth,” including branches and IT. “We have 22 branches, soon to be 23. We’ve got a good, strong IT department. We’ve got a good marketing team, a good business development team. So we had everything in place to handle the growth; we knew that before we started.”
Case Study: South Florida FCU
For the past three years, $35.8 million/4,200-member South Florida Federal Credit Union, Miami, has been growing at an astounding rate, between 15 and 18 percent per year. This growth is all the more impressive because it comes at a time when both consumers and financial institutions have been struggling. Ironically, it is in part because of the economy that the CU has been able to increase its size.
“In a nutshell, we’ve always had a philosophy to help our members, but I believe we have really reinforced it more lately,” says President/CEO Maggie Martinez, a CUES member. “We have found that in the last couple of years, a lot of our credit union members have gone through a lot of financial hardships. We have reached out to them, and we are helping our member in every way, shape and form, just to make their economic difficulties a little bit easier.
The level of growth South Florida FCU has been experiencing is based mostly on member referrals and website hits, Martinez says. In addition, last year, NCUA approved the CU’s underserved community field of membership expansion. That expansion led the CU to become part of a credit union advertising co-op on a local NBC channel.
“The television spots and television station website direct prospective members to our website. So people are calling us from around the area,” she says. “That’s what has constituted our growth. When they come in, we capitalize on grabbing that member immediately and make them feel like this is the place where they want to have all of their checking accounts and all of their financial assistance.”
Like Mission FCU, South Florida FCU is cognizant that not all growth is created equal. “As CUs, we need to grow smart,” states Martinez. “So we’re always growing loans and checking accounts. We started offering a second-chance checking account for those who cannot open a bank account. And we’ve also offered an alternative to payday loans. There are a lot of payday sources here around the Miami area. We are trying to educate people that they don’t have to go [to those businesses] and pay outrageous rates.”
The second-chance checking account encourages (but doesn’t require) direct deposit and offers free bill-pay, online banking, secure remote check deposit and the options of checks and debit cards. After a year, the CU will consider adding privileges such as courtesy pay to the account if the member has properly managed the checking account.
As for the payday alternatives, the CU charges a $20 application fee and educates members about other options, including lower interest loans or debt consolidation.
“These short-term loans are provided to assist members who have an emergency need. We provide an incentive for them to make the payments with direct deposit by providing a rate reduction. Our rate on this loan is 26 percent, or 22 percent with direct deposit,” says Martinez.
The CU carefully manages its loan-to-share ratio, which has been in the mid 80s for years. Recently, it dipped a bit lower, to 67 percent, due to large loans that were paid off at the beginning of the year and recent large deposits. “We are doing loans and we anticipate that the ratio will go up to low 70s in the next coming months,” says Martinez. “We have found that this is an opportunity time to grant loans to our members where everyone else is not. In July we closed approximately $945,000 in loans; if we continue with this trend our ratio will go up again.”
Being careful with its loan-to-deposit ratio allows the CU to invest in conveniences that are usually out of reach of small institutions. The CU is heavily automated, offering tools such as a remote deposit capture for its members. And the back office is constantly tracking metrics such as concentration risk. As the CU has grown, it has spent money on technology instead of hiring more staff, Martinez says.
“We act like a big credit union,” she says. “And we’re growing to get there.”
Jamie Swedberg is a freelance writer in Athens, Ga.
