Taking It From The Ritz:A Lesson In What Drives Success

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The first Ritz-Carlton hotel opened its doors in Boston in May, 1927. The hotel based its original business plan on providing the ultimate in luxury, innovation, and privacy to the world's financial elite. Success has not been easy-there have been good times and bad. During the Great Depression lights were kept on in vacant rooms to portray an aura of success. The Ritz-Carlton never lost sight of its mission and vision. Today, the Ritz-Carlton name remains synonymous with luxury and, despite the Great Recession, the lights are still on.

Mission and vision can have a powerful influence in achieving success. Establishing and maintaining mission, vision and focus are at the heart of successful strategic planning. The question is, "Is your credit union keeping the lights on by maintaining focus on your mission and vision during these tough times?"

The last two years have been particularly difficult for credit unions. Home mortgage foreclosures and staggering losses in employment eroded confidence, materially changing consumer spending, borrowing, and savings habits. Investment losses in mortgage backed securities led to receivership of two of the nations' largest corporate credit unions. NCUA stabilization assessments, capital write-offs, generally soft loan demand, deteriorating asset quality, and accelerated deposit growth combined to threaten credit union profitability and net worth. And yet, despite the challenges, some credit unions are producing exemplary financial results. How are they doing it?

To explore the secrets of high performing credit unions, we recently studied first quarter 2010 CU performance to identify, compare, and contrast financial performance. Forty financial performance indicators were selected for evaluation. U.S. credit unions were segmented into 10 asset categories aligned with NCUA peer groups. Credit unions within each asset category were sorted based on Q1 2010 ROA performance, and the top and bottom 10 ROA-producing CUs in each asset category were analyzed to identify differences and commonalities among top performers.

In an environment of broad gross margins it would be easy to assume that top-performing credit unions characteristically sustained high loan to asset ratios. Interestingly, that was not necessarily true. There were, however, four commonalities that virtually without exception were characteristic of first quarter 2010 high ROA performance:

* High Net Worth. The average net worth ratio among credit unions in all 10 asset categories was substantially higher than that of CUs at the lower end of the ROA spectrum in March 2010.

* Superior Asset Quality. Total Asset Quality (delinquency ratio plus net charge-off ratio) among credit unions in all 10 asset categories was better than that of credit unions at the lower end of the ROA spectrum in March 2010.

* Lower Operating Expense. With only one exception (credit unions in the asset range of $100 million to $500 million) credit unions in the top tier of ROA production in March 2010 posted significantly lower operating expense than low ROA performers.

* Greater Share of Wallet. With only one exception (credit unions in the asset range of $500 million to $1 billion) top-tier, ROA producing credit unions posted higher share of wallet (measured by total loans plus total shares per member) than credit unions in the lower end of the ROA scale.

Perhaps of equal significance was the realization that top ROA producers did not necessarily operate at a higher net interest margin than other credit unions in their asset range. In fact, top ROA producing CUs in the asset ranges of $250M and greater operated at a lower net interest margin than credit unions in their respective asset category that generated significantly less ROA. In contrast, top ROA producing credit unions in the asset categories below $250M relied on higher net interest margins to help produce their superior return on assets.

When these findings are coined in the context of strategic planning some interesting contradictions emerge. Credit unions often highlight member service as the cornerstone of their mission. And, it's not unusual for directors and managers to point to "exceptional, personalized service" as the credit unions' primary market differentiator.

Logically, greater share of wallet should be a natural outcome of exceptional service. But, the decisions a credit union must make to achieve higher net worth, superior asset quality, lower operating expense, and potentially higher net interest margin (for CUs with assets of $250M or less) have a potential to degrade total member value and could lead to members taking some or all of their business somewhere else.

How does a credit union balance financial success with creating and sustaining exceptional member service? The answer should lie within the credit union's defined mission and vision.

The Ritz-Carlton is astutely aware of its "Gold Standards," the values and philosophy by which it operates. For credit unions, striking "gold" begins with strategic planning and the creation of a clearly defined mission and vision.

 

Dean Borland is with OnBalance is a service of Credit Union Resources, Inc., a subsidiary of the Texas Credit Union League.e_SIht

The first Ritz-Carlton hotel opened its doors in Boston in May, 1927. The hotel based its original business plan on providing the ultimate in luxury, innovation, and privacy to the world's financial elite. During the Great Depression lights were kept on in vacant rooms to portray an aura of success. The Ritz-Carlton never lost sight of its mission and vision, and today its name remains synonymous with luxury, and the lights are still on.

Mission and vision can have a powerful influence in achieving success. Establishing and maintaining mission, vision and focus are at the heart of successful strategic planning. The question is, "Is your credit union keeping the lights on by maintaining focus on your mission and vision during these tough times?"

The last two years have been particularly difficult. Foreclosures and unemployment eroded confidence, materially changing consumer spending, borrowing, and savings habits. Investment losses led to receivership of two of the nations' largest corporate CUs. NCUA assessments, capital write-offs, generally soft loan demand, deteriorating asset quality, and accelerated deposit growth combined to threaten profitability and net worth. Despite the challenges, some CUs are producing exemplary financial results. How are they doing it?

To explore the secrets of high performing CUs, we studied first quarter 2010 data to compare financial performance. CUs within each asset category were sorted based on Q1 2010 ROA performance, and the top and bottom 10 in each asset category were analyzed to identify differences and commonalities among top performers. There were four common characteristics among the top performers:

* High Net Worth. The average net worth ratio among credit unions in all 10 asset categories was substantially higher than that of CUs at the lower end of the ROA spectrum in March 2010.

* Superior Asset Quality. Total Asset Quality (delinquency ratio plus net charge-off ratio) among CUs in all 10 asset categories was better than that of CUs at the lower end of the ROA spectrum.

* Lower Operating Expense. With only one exception (CUs in the asset range of $100 million to $500 million) the top performers posted significantly lower operating expense than low performers.

* Greater Share of Wallet. With only one exception (CUs in the asset range of $500 million to $1 billion) op performers posted higher share of wallet (measured by total loans plus total shares per member) than bottom performers.

Perhaps of equal significance was the realization that top ROA producers did not necessarily operate at a higher net interest margin than other credit unions in their asset range. In fact, top ROA producing CUs in the asset ranges of $250 million and greater operated at a lower net interest margin than peer CUs that generated significantly less ROA. In contrast, top performers in the asset categories below $250M relied on higher net interest margins to help produce their superior return on assets.

When these findings are seen in the context of strategic planning some interesting contradictions emerge. CUs often highlight member service as the cornerstone of their mission and primary differentiator. Logically, greater share of wallet should be a natural outcome of exceptional service. But, the decisions a CU must make to achieve higher net worth, superior asset quality, lower operating expense, and higher net interest margin have a potential to degrade total member value and could lead to members taking some or all of their business somewhere else.

How does a CU balance financial success with creating and sustaining exceptional member service? The answer should lie within the credit union's defined mission and vision.

The Ritz-Carlton is astutely aware of its "Gold Standards," the values and philosophy by which it operates. For credit unions, striking "gold" begins with strategic planning and the creation of a clearly defined mission and vision.

 

Dean Borland is with OnBalance is a service of Credit Union Resources, Inc., a subsidiary of the Texas Credit Union League.

 

 

 

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