GREENVILLE, S.C. — Faced with soon-to-be non-existent investment income in 2009, Greenville Heritage FCU had two choices: hike fee income, or completely rebuild its loan program.
Raising fees would have been a whole lot easier, but the $78 million CU opted to revamp its whole approach to lending. The result: over the past five years, Greenville Heritage has grown loans at a rate of more than 18% year over a year (a metric also known as the cumulative annual growth rate, or CAGR). During that same time period, GHCU also increased its ROA from .65% in 2009 to 1.8% at yearend 2014, and boosted its loan-to-share ratio from 65% to 95%.
The first step, according to Alan D. Berry, who took over the 12,515-member CU at the end of 2008, was to educate the board.
"Our board would spend time focusing on the teller drawers over and shorts," Berry related, noting that when he took the reins the CU was faced with roughly $10 million in investments earning approximately 5% — income Berry knew would shortly vanish. "We had to look at our lost investment income and how to replace that with loan income. The potential decline in income from maturing investments was a very real concern. The opportunity cost of not making loans was huge. We had to focus on lending."
Berry made three major changes to the credit union's lending philosophies.
- Be a loan megalomaniac — Berry talks about lending all the time.
- Centralize the lending process.
- Create incentive plans for loan officers.
"We went to centralized lending so we could give loan officers an incentive plan," Berry explained. "Loan officers couldn't earn incentives if they made the lending decisions. In the future, their raises would depend on their production."
The result: "right out of the chute we had two star performers, a couple people in the middle of the pack and a couple people staying with the pack," he said. "Everyone is on the incentive plan except the back-office folks. We don't shy away from the word 'sell.' Everyone sells something. We sell money. Don't apologize for it — get good at it!"
Greenville Heritage pays $2 per thousand for loan production above the loan officers' base floor requirement. "We have primarily a blue-collar membership, and we make sure that we sell our loan products," Berry offered. "Our members need our GAP, mechanical breakdown insurance and loan protection coverage. It also helps maintain our bottom line."
The portfolio mix is also very important, according to credit union consultant Rory Rowland. "Fifty percent of the credit union's loans are above a 700 FICO score," he said. "Thirty percent are above 600, 11% are above 550 and 8% are at 550 or below. You can't be afraid of working with some of the lower credit scores."
Berry agreed, saying that in order to earn over 7% yield on the loan portfolio, a CU has to be willing to loan to high-risk members. The key is that lending to those with scores at or below 550, the collections process has to start the same day the loan is made.
"You have to inform the member that you're taking a risk with them and that you will do everything in your power to collect the loan," Berry said. "No payments on the current loan and no loans for you in the future."
Credit unions also need to look at their pricing to ensure that all loans are paying for themselves, be they subprime loans or loans to A and B paper.
While Greenville Heritage chose to focus on making loans, that doesn't mean the CU stopped paying attention to the deposit side of the house. In fact, the credit union made some key changes to its deposit philosophy, as well.
"Greenville Heritage is not interested in attracting money it can't loan out," Rowland advised, noting that Berry's goal is to match deposit and loan growth. "Why pay high rates to house CDs you can't make money on? Would you buy rental property that no one would rent," Rowland asked. "Why hoard CDs you can't loan out? Just to bloat your balance sheet? Is a bloated balance sheet a wise business decision?"
"Some CUs focus on building branches, but they need to focus on building the loan portfolio," Berry said. "Seven of 22 of the credit unions in South Carolina between $ 25 million and $150 million in assets had negative loan growth for the 2014. That is not a sustainable way to do business. Credit Unions must grow loans and assets."
And that growth is all the more critical for small credit unions.
"If your CU is under $25 million in assets you have to grow the CU to 50 to 100 million in assets to survive," Berry said. "Our goal is to drive the loan and deposit growth so that we are over $100 million in assets in five years. We will reach that goal well before that timeline."
How will Berry get that done? Continuing to focus on loan growth.
"Growing loans is the key to growing your credit union. It is amazing to see the results my people have gotten because we focused on loans. If you set a direction, and you continue to focus it is amazing what your people can accomplish," Berry said. "Lots of credit unions talk about strategy, but strategy without execution is dead. Take the Superbowl for example: Seattle was one yard away from victory, but poor execution lead to a bad result. Results matter. Focus on making positive results for your credit union by growing loans."
