Credit unions may be not for profit, but that doesn't mean they can afford not to be profitable.
Libby Bierman, analyst with Sageworks, a financial information company in Raleigh, N.C., said any conversation about profitability at credit unions has to touch on the people who work there.
"At the top of the list: credit unions should empower their employees to be more efficient," she said. "Staff should be able to audit which relationships are more or less profitable, and look for opportunities to transform a saver into a borrower, or offer more products or services to make the relationship more meaningful."
The long-term goal, Bierman continued, is for CUs to develop a sustainable relationship with members.
Credit unions should also consider building connections with the businesses in their community. "It starts with the audit of the relationship, and then look for services that make sense. If there are a large number of members who are low-profitability, then you will want to work with those members and optimize the relationship."
Improve Efficiency
Credit unions also should look at their efficiency levels, and identify processes that are holding back staff from spending time with existing or prospective members. Bierman said from a management perspective, this means examining the workflow process.
"There can be places in the documentation phase that takes days instead of hours, which can hurt the relationship with the member," she observed. "Analyze the workflow to see where time is allocated and look for opportunities to improve bottlenecks."
There are many technologies that can take numbers from paper documents and put them directly into the credit union's system, Bierman noted. Also, in the administration or servicing of loans, she said a loan officer often has to make document requests one by one — meaning a mail merge program could gain efficiency without changing the process or requiring system changes by the credit union.
Audit Data Flows
CUs can improve their overall profitability by eliminating redundancies that can build up in various systems, according to Bierman, noting oftentimes information must be entered and later reentered.
"Credit unions should audit how data flows between systems. Make sure systems are talking to each other so steps do not have to happen again," she counseled. "These tie back to the bottlenecks in the second point. Credit unions that have member business lending have to do a lot of documentation, so inefficiencies can creep up pretty quickly."
Sageworks sees a significant number of credit unions that are used to doing consumer lending, and then later add business lending. In some cases, Bierman pointed out, the information ends up being stored on two different core processing systems.
"These silos are fine for operating, but when it comes to system-wide reporting or ALLL, it takes a long time to work with disparate systems and make it meaningful."
Broaden Reach
Dr. Brandi Stankovic, a Las Vegas-based credit union consultant with the firm Mitchell, Stankovic & Associates, who also works part-time at $537 million Boulder Dam Credit Union in Boulder City, Nev., offered one suggestion for income generation and one for expense reduction.
"One of the major opportunities in loan growth is to broaden reach by working with people who have lower credit scores," Stankovic said. "It is possible to work with existing members — and these are people credit unions could be serving better, anyway. A lot of those people have been reaching out to online lenders and alternative lenders, so get them to borrow from the credit union instead."
On the expense reduction side, she noted that there is an opportunity in leadership development that many CUs are missing. This involves making an investment, so "it does not sound like an expense reduction on the face," she quickly added, but then insisted by focusing on leadership development credit unions that follow this advice will find there is a "trickle down" that creates value for the organization.
"It is important to note that recruiting a CEO externally is 1.7 times more expensive than internal development," she said.
It is never too early to begin the process of leadership development, even if the CEO is not planning to retire for several years, Stankovic added. "Because the process itself creates value to the credit union. It leads to having a more cohesive team, and developing a culture of empowerment among the staff so they can serve the members better. It also helps overcome any disconnect between executives and the front line."
Profit Risk
There are many risks CUs have to be on the lookout for, including interest rate risk, credit risk and concentration risk, but Naseer Nasim says profit risk is one that often is overlooked.
Nasim, president and CEO of Baker Hill, a Carmel, Ind.-based software and solutions provider for 600 financial institutions, told Credit Union Journal he believes a focus on mitigating profit risk has the potential to make a "huge strategic change" for credit unions.
Simply put, profit risk (or profit concentration) is calculating what percentage of a credit union's members are in which product and are driving earnings. Nasim noted in 2007, when the financial markets started to crash, it was due in large part to the fact there was a single product becoming the driver of the entire industry — mortgages.
"[Washington Mutual] and other organizations should have noticed there was too much concentration in one area," he assessed. "Today, credit unions can both mitigate profit risk and increase their profitability by diversifying their portfolios."
Having the right technology helps analyze the components of a credit union's income statement, Nasim continued. "Have a good grasp of the costs. Analytics give a 360-degree view of each product, each account, each relationship, which gives a clear understanding of costs."
Increase the Percentages
Most CU executives are familiar with the 80-20 rule — the expectation that 80% of income is driven by 20% of members — but Nasim warned this old standby can be completely wrong. He said he has seen instances where, because so many accounts are unprofitable, 10% of a credit union's member relationships can actually account for 300% of its profitability.
When such a disparity can be identified, Nasim said marketing communications and strategies can be focused on the 90% that are not as active with the CU to increase wallet and market share. "It is all about nurturing relationships to build more products, and with analytics, it can be addressed very specifically to the products that drive earnings."
Most organizations talk about cross-sell ratios, with the idea being the more products that are sold the more profitable the relationship becomes. According to Nasim, that is another widely accepted axiom that is not necessarily true. He argues there are key relationships that make some products more profitable than others, while some products actually carry additional costs for the organization.
"There needs to be a change in the way we look at cross-selling: moving from a sales culture to a sustainable profitability and growth culture," he said, citing the example of a member who has just a $5 share account — an account that carries an annual maintenance cost that exceeds $5. "This individual needs to be brought into a profitable relationship," he advised. "Same with an indirect lending member who only has one product. Technology gives a 360-degree view that helps the credit union identify the right combination of products that lead to profitability."
One of the formulas some of Baker Hill's clients are using to understand profit risk is the profit generated by the top 10% of relationships divided by total net income. Nasim said some find just 2% of relationships are driving 100% of profitability, "which is very risky."
"Organizations need the right analytic tools to make sound decisions," he said. "It has to go beyond channel analysis or loan analysis to include a database integration tool. Everyone has good intentions, and some understand the concept of profit risk, but they need tools to build a business intelligence system. The sales plan and marketing plan need to be integrated to mitigate profit risk across the organization — and I do not see a lot of that in credit unions."
