Tiny Ohio CU Finds Collaboration Is The Key To GRO-ing Its ROA
MANSFIELD, Ohio-The $7.8-million GROhio Community CU expects to generate 75 basis points ROA this year after assessments, and it is crediting much of that to collaboration.
CEO Jeff Green insists a small credit union cannot survive without collaborating-and more than just with other CUs. GROhio is prospering by striking a unique deal with a large local employer to get a new building that's driving loan growth, providing financing for two used car lots, and forming a friendship with a couple of local banks that are sending the credit union business.
"Collaboration is the most important thing to the survival of a small credit union," Green told Credit Union Journal. "You cannot sit inside your bricks and mortar and expect to do well. You have to step out of your credit union, shake people's hands, tell them what you have to offer, and they will work with you."
That philosophy has led two local banks to regularly send auto loans the credit union's way when their lending guidelines won't allow them to make loans on cars older than model year 2005. "It's good for the banks, because they are providing their customers with a solution rather than just turning them away, and it is good for our credit union," Green said. "The banks know I am not trying to steal their customers."
Not a big fan of heavy indirect lending with big local car dealers-who Green said often send one bad loan for every four good ones-the CEO has structured a partnership with two used car lots that are providing GROhio with quality loans. "Theses are generally not big loans, usually $8,000 or less. But they help and the used car lots don't have to do their own 'buy here pay here' deals."
GROhio, which has a community charter, also worked a deal with one of its former primary sponsors. The company, which expanded and built a 450,000-squre-foot operation, wanted the credit union nearby to help its workers. Green knew the CU's loan portfolio would benefit significantly from the company's 4,000 blue-collar workers. However, NCUA limits on how much a credit union can have tied up in facilities did not make constructing a new office possible.
"We could not build an office for $300, 000," noted Green. But the president of the former sponsor suggested investing $1.5 million in the credit union in multiple $250,000 CDs that would move up the ceiling on how much the credit union could spend on a new building. That allowed GROhio to assemble a 1,500-square foot office in 2010 for $450,000. "The sponsor leased us the land so we did not have to buy it. It's a 40-year lease with the first ten years at nominal pay."
'Small Chunks of Business'
GROhio also joined the Cincinnati-based Cooperative Business Services CUSO to get involved with business lending, leveraging that organization's contacts and expertise. "We'll probably pick up $400,000 from them in next year or two. We take small chunks of the business loans and let the big credit unions take the big chunks."
The new office and the workers nearby have played a large role in the CU's loan portfolio growing by 60% over the last two years, said Green. "We now have $4.9 million in loans and we were at $3 million. That has made us very profitable-our average yield on loans is above 9%. If small credit unions count too much on short-term investments right now they are dead. You have to build your loan portfolio."
Where's That Yield Coming From?
Much of the yield is coming from loans on C, D, and E paper, explained Green. About 30% of the portfolio is in signature loans and the balance is generally new and used vehicle loans. New and used car rates are risk priced. For members with a Beacon score above 700, rates can start as low as 4.10% APR for new and 4.95% for used. But rates can move to as high as 8.99% for new and used cars 2009 and newer. Used car rates for 2001 vehicles and older can come in at 14.90%. "If members have a Beacon score below 700, we add 1% for every 20-Beacon-point reduction onto our best rate. Every lender now wants the A and B paper, and they are competing like crazy for it. Those rates are often down to 2.95%. That does not help your balance sheet."
But Green said GROhio manages the risk by covering the cost for its current 2% delinquencies in the loan rates, overfunding its allowance for loan loss reserves, and by knowing its members. "Many of these members have been with us for five to ten years, have steady employment, and direct deposit and payroll deduction. There is a lot of good C and D paper, as well as bad. But we don't buy the bad. What you find today, due to the economy, is that people have some blemishes on the credit due to something that happened in the last year or two. They are good borrowers, but their score is down."
With each loan the credit union generates additional revenue from and $80 application fee that used to be $20 when the CEO took over 11 years ago. "If credit unions have a low application fee, they need to raise it slowly, not all at once. Credit unions-especially small ones-need to build other income sources."
Collaboration has been the key to success for GROhio thriving in the last few years, growing assets by almost $3 million in 18 months. Those business-building partnerships, however, will not happen if the CU does not pursue them, advised Green. "You have to get out into the community, talk to the used car dealers, the banks, and the businesses. It will help you build partnerships and membership too. We don't even have to advertise."