RIDGECREST, Calif.-Here on the eastern side of the Sierra Nevada Mountains, on lonely Highway 395 between Mojave and Mammoth, "prompt" is a relative term.
Although being under scrutiny from one's regulator might be no laughing matter to many CU managers, Eric Bruen noted that the $21.5-million Desert Valleys Federal Credit Union has a remarkable bit of history with Prompt Corrective Action-and chuckled.
"Desert Valleys is the only credit union in the nation that has been under PCA since PCA became law 11 years ago," he said with no small amount of amusement. As if anticipating the next question, he added, "at some point you just have to be able to laugh at the circumstances. Our capital was as low as 2.2% at one point. We were spared by NCUA from merger in the late 1990s because the membership was very anti-merger. Today, under the same circumstances we would be merged immediately."
Today the credit union's capital is just a tad above 6%.
Bruen serves as chairman of the Shapiro Advisory Committee, an affiliate of the California CU League formed to help small credit unions. Not surprisingly, he is the "PCA expert" for the group.
Compliance is a "huge issue" for Desert Valleys and for all small CUs, Bruen assessed. He argued the legislature is "only making things more difficult for the banking industry to operate," highlighted by the many ramifications of the Dodd-Frank Act and "the interchange debacle."
A Lot Of Reading
"Just staying ahead of the curve is difficult for small credit unions because we don't have the manpower or the resources to do all the steps, develop policies and keep up with documentation. Not all issues are relevant to every credit union, but there is a lot of reading. A small credit union CEO might have a staff of one or two people, so there is no one to delegate it down to."
Most credit unions that went under PCA in 2008-'09 and bounced back quickly did so because they set aside "huge" loan loss reserves that were reversed later, Bruen noted. He said "there is no cookie-cutter recipe," for CUs to follow, and asserted Desert Valleys has been successful because it recognized it had to do things differently to survive PCA.
"If we didn't change our model, we would not have survived," he said. "We understand and covet the relationship between the regulator and the credit union. I have to have a relationship with the NCUA and there has to be trust between us to survive. Some credit unions take an adversarial relationship with regulators."
The strategy pursued by Desert Valleys over the years, Bruen continued, is to do what is right, not always what is most popular. An example of doing what is popular would have led it to book first mortgages in 2005. There was money to be made in real estate lending back then in a California market hotter than the local desert, he recalled, but DVFCU opted not to enter the mortgage market.
"Under PCA it would have been too big of a portfolio risk for us," he explained. "We would have grown faster than we could have supported. We were $12 million in 2004; we will be $22 million at the end of this year. Not a huge amount of growth, but almost double. We had to do it at a measured pace."
In its June 2011 Call Report, Desert Valleys reported first half net income of $47,347. Its net worth ratio was 6.01%, making it "adequately capitalized." In 2010 it posted $203,628 in net income excluding assessments. It paid $22,022 to the NCUSIF and $25,607 to the corporate stabilization fund, leaving it with net income of $155,999.
In many cases, Bruen said, small CUs get "stagnant," either in the products and services they offer to the technology they use. He emphasized the importance of realizing when the industry has changed. He said many credit unions were offering HELOCs in 2006, but if they had continued to offer the loans from 2006-08 without making changes to appraisals, they would be in a huge hole.
Although technology can be among the largest expense items on the balance sheet, Bruen said it is an important expenditure because members want to communicate differently today. He said the successful credit union is actively pursuing information and knowledge from its state and national trade associations, while the ones that are facing challenges "are the ones who have kept themselves isolated in the bubble."
"We always try to keep up with other credit unions, but times and member expectations can change. The member meeting with meals and prizes worked well in the 1960s and '70s, but are they still appropriate use of member funds today? Even though a product may have been offered for 10 or 15 years, doesn't mean it still is the right product."
So how can small CUs succeed? According to Bruen the leaders of smaller credit unions must be active, educated, aware of their environment and able to change.
The Riches in Niches
"No one decision can be defined as successful or unsuccessful," he said. "The successful credit unions are inherently aware of what their member needs are and what their niche is. If credit unions were meant to be the same, there wouldn't be 7,000 nationwide. There would be four, like the big banks. The credit union industry has been merging and consolidating, so the argument could be made we are heading in that direction, but we continue to have niches and serve niches. This could be serving a SEG, or being out in the middle of the Mojave Desert. Know who your members are, what their needs are and how to best serve them."
As one of the leaders of the Shapiro Group, Bruen will be in attendance at the California League's Annual and Convention in San Diego this week. He said the Shapiro Group and the RMJ Foundation provide grants to help small CUs attend the gathering.
"It is an important conference not only for networking but to truly understand what is going on in California and Nevada," he said.
