Hard Choices

CORONADO, Calif. — Credit unions can grow in 2009 and beyond, but it's going to require some hard choices.

That was the message to attendees at Credit Union Journal's Grow Show by opening keynoter Brett Christensen, president of Austin, Texas-based CU Lending Advice, who made it clear there are plenty of opportunities for credit unions to grow lending and ROA-but they will likely not like the tough decisions needed to be made.

"If you want a minor challenge to your ROA, cut out attendance at conferences or free lunches for staff," suggested Christensen "If you want a dramatic change to your bottom line, you might want to consider dramatic changes."

Citing his own experience as VP-lending and service at Clark County Credit Union in Las Vegas, he noted it went from 1.4 ROA to 2.7 in just one year. "I left and they had 12 straight years of ROAs between 1.5 and 3.5. Most credit unions can't even remember a 1% ROA."

The $640-million Clark County CU has been aggressive about bonus dividends to members, having refunded $48 million to members over the past eight years. That has created awareness and loyalty among members. Most recently it returned $2 million to members in February. It will be the last refund for a while, however. "There will be no bonus dividend this year, it went to WesCorp," noted Christensen.

One of the big challenges to credit unions everywhere is what Christensen calls "stupid lending."

"I have no sympathy for the lenders who have gone under, the corporates that have gone under," he told Grow Show. "If there is one huge lesson to learn form this: your CU doesn't want to get caught in stupid lending."

The big national banks are for the foreseeable future going to be focused on "A" paper, said Christensen, adding, "This is a real opportunity for you to build up some loans. It will be very difficult for members with less-than-perfect credit to get a mortgage loan. This may be an opportunity to make some loans to members with sloppy credit. This does not mean making some of the mistakes that the mortgage lending industry has made. But you can help some people get out of miserable subprime loans."

With credit card limits being lowered or even shutdown for many cardholders, Christensen urged CUs to invest in the FICO 08 version from Fair Isaac. Among the changes: any collection under $100 does not hurt the score.

"Credit union CEOs and boards are now even more hesitant to make loans to sloppy credit," he said. "Just because mortgage industry did some stupid things doesn't mean you can't help people with sloppy credit. You can still make loans."

Growing a credit union, Christensen said, will require:

• A full range of products and services. "They have to be convenient and your employees have to be able to sell them. I've been to many credit unions with outstanding products, and they can't sell their way out of a paper bag."
• Outstanding service.
• Low loan rates, high savings rates.
• A move toward advanced technology.

Profitable credit unions, he added, will have:

1. Healthy percentage of fee income.
2. Low operating expenses
3. A healthy percentage of higher yielding loans
4. Loan losses kept in check.
5. A strong direct lending effort.

Where many credit unions fail, said Christensen is in not recognizing they have so many unprofitable accounts. "Sixty percent of members cause you a loss. It's a little difficult to have a strong bottom line if 60% are causing you a loss."Christensen is strongly critical of indirect auto lending, calling it a "miserable business" that doesn't serve members, but auto dealers, and that has led to untold losses for credit unions.
Another hard decision for credit unions to make is whether to cut staffing, he said, adding the only question to ask is, "Are you overstaffed or grossly overstaffed?"

"Lots of you have a lot of employees you built up when times are good," he said. "When I travel around, every department in every CU in every state says they are so busy."

But they're not busy enough, according to Christensen, who urges CUs to "take disbursed consumer loan volume per month and divide by 20 days per month and divide that by number of employees, and you find they do $3,000 to $7,000 per day. 'I'm so busy.' Busy doing what? To get your bottom line stronger you need to push more to the phones. You build a branch and fill it full of expensive humans and it's like $8 per transaction. Get it done by phone and it's $2, online is even less. Some big CUs have a teller who reports to a lead teller who reports to the assistant branch manager who reports to the branch manager who reports to the regional manager who reports to a VP who reports to a CEO."

Christensen called for fewer, more competent, more highly paid employees as the model. Some of you have gone to the more highly paid, but did you go to the fewer and the more competent? One-stop shopping employees means jacks of all trades and masters of none. To fix this, let's divide sales from service."

The bottom line isn't going to change without a lot of effort, he reminded.

"It was point three ROA in credit unions even before the bailout checks were mailed," Christensen observed. "If you want to improve that, you might have to do things differently."

Credit unions have two options, according to Christensen, who doesn't favor one of them.

• Relationship Pricing. "This is a very sound and basic principle, if you're scratching my back, member, I'm scratching yours. If you bring your business here, we've got free all day long. If you choose to take your business down the road we've got fees. This takes work."
• Courtesy Pay Fees Attached To a Debit Card. "You make me sick on this. If you charge $25 to $30 on a bounced paper check, I'm fine with that. When it becomes a problem is when you attach it to the ATM and debit card. Hey, do you want to pay $28 for a Big Mac, or $45 to take $20 out of the ATM?"

Christensen's other observations:

• Nearly every CU is overbranched. He believes there should be one branch for every $50 million in assets (at a minimum).
• Pointing to a front page of Credit Union Journal that listed money-losing CUs, he said. "I call it revenge of the little ones. The big advantage the big ones used to have wa a 2% expense ratio, but then decided they needed to be much bigger and they doubled to 4%. The rainy day came and they can't survive it."
• There is no money to be made on loans to A paper, due to competition. But C, D and E members offer opportunity and need a lender. "The members with the greatest need for loans are the reason we were founded. Don't tell me you can't serve these members in this economy. 98.9% of these members at one CU paying on time every month. They need a car to get to work. You just can't freak out when the first few go bad."