FOM Expansion Sometimes Is Only Way To Survive
SHREVEPORT, La.-For small, single-sponsor credit unions, expanding the charter may sometimes be the only means of survival.
Helen Godfrey-Smith, CEO of the $90-million Shreveport FCU, takes that position and often provides guidance to small credit unions to help them pull through the current economy.
She explained that too many small shops are taking too many big hits to their ROA-lower-paying investments, NCUA assessments, and a drop in lending-to keep their heads above water.
Strong capital positions are being quickly eroded and then a small credit union faces what could be the first step toward elimination or merger, Prompt Corrective Action.
Godfrey-Smith fears that is the situation facing a small single-sponsor credit union in Baton Rouge, La. She is working with the $30-million CU to develop a business plan for charter expansion to bring up ROA and avoid NCUA intervention.
"In 2008 this credit union's capital was at 11.05% and through the economic downturn it has dropped to 7.4%. So now we have to do something to keep them from the clutches of PCA."
Godfrey-Smith said expanding the small credit union's charter to open up more opportunities for lending and to offer more products and services is the quickest and best way to bring up ROA and capital.
Godfrey-Smith said her board supports her providing assistance to small credit unions, when Shreveport FCU itself was once the beneficiary of such help when it was smaller.
Getting A Plan In Place
But Godfrey-Smith emphasized that a small credit union must properly develop a business plan to expand to not only receive approval from the NCAU-which she reminded does not easily grant charter expansions and carefully scrutinizes expansion requests-but to also be prepared to serve a broader consumer base.
"The plan must look good to the NCUA, to show that the credit union has the resources-or the plan to get them-to have a stronger presence and serve a broader field of membership."
Part of the plan, and a major step, stressed Godfrey-Smith, is that the credit union must already have or must work to establish a relationship with a shared branching provider.
"Setting up with a credit union service center is one of the first things they should do, because it is far more economical than deploying a full-service branch."
Next, the credit union should invest in the Internet, said Godfrey-Smith.
"Invest in the virtual branch, maybe even possibly social media so they will have a higher presence on the web. This not only extends their reach at minimal cost but also shows the NCUA the credit union is thinking progressively."
A critical change, stated Godfrey-Smith, is the credit union has to often alter its approach to lending.
More Member-Friendly Lending
"I tell them they need to look at lending in a more member-friendly way. In other words, the credit union takes down hindrances and obstacles to making loans they have built into their policies, such as requiring a large down-payment on car loans regardless of the borrower's risk profile," Godfrey-Smith told Credit Union Journal. "They must also utilize tight delinquency control to avoid the potential pitfalls of the more risky lending. Essentially, you are changing the culture of the credit union to a more lending-focused CU."
Godfrey-Smith contended that developing a strong lending focus is an expedient way a small credit union can add to the bottom line. "If you change your mentality from doing many small $1,000 unsecured loans to doing many more higher-dollar solid automobile loans, now you have collateral and you also have a monthly increase in your income."
Going to an expanded charter also demands that small lenders adopt risk-based pricing as they diversify their loan portfolio.
"By expanding your membership you now have a more diverse risk model, whereas in the past you could have used a solid 5% to 6% for auto loans when dealing with like concentrations," she suggested. "That does not work now because you have everyone coming in the door so you have to have a good way to measure that risk individually on all the loans."