WEST PALM BEACH, Fla. - Most keen observers of the industry canpick out your high-flying credit unions. These are credit unionsthat perennially top rankings and listings for things such as loangrowth, ROA, asset growth, new members, etc. But at some point, noteven these perennial winners were high-fliers, so how did they getthere? An intriguing report, entitled "Taking it to the Next Level"identifies 11 CUs that went from relatively average performance tobecoming standouts. "We were trying to look at credit unions thathave made a move to a higher level of performance and sustained itover time. What did they do? What were the factors that led to it?"said Richard Kamm, one of the authors of the study, which was doneby the Institute for Strategic Learning, a consulting firm based inNaperville, Ill. ISL provides strategic planning and otherconsulting services for CUs and other industries. ISL evaluated1,711 CUs with assets over $50 million from the years of 1992 to2002. ISL used net income as its barometer so to speak. It lookedat these 1,711 CUs and compared net income of each of them comparedto the average net income of a similar sized CU for that period.First it needed to find average CUs, so it identified CUs that fora period of three years or more had net income that was at or below1.25 times the average. Then to find those CUs that made aturnaround, it looked for CUs that had a period of five or moreyears where ROA was 1.25 times the average, thus finding your newhigh-fliers. In the end 11 CUs made the list (see listing page 1).Kamm said what was interesting is that the list of 11 isdiversified in so many ways. "They aren't all big, aren't allmedium, aren't all small. They vary in geographic region. One couldlook at this and expect credit unions in areas that wereeconomically successful during that period to be there," said Kamm.And there are some of those, namely those from Silicon Valley area,but others don't fit the booming area profile. There's one from thesmall market of Green Bay, Wisconsin and another from an area ofMichigan that had tough economic times. The study cites a fewcommon threads among these CUs. First, it said each had a clearlyidentified "central strategic focus", where it didn't seek to beall things to all people. Next these CUs had "created their ownfuture" in that their strategic plans were not set by crisis orother problems, but a desire to carve their niche. The CUs alsotook care of home first, meaning they mined their existing FOMs andmarkets, while other CUs sought to grab the biggest charterexpansions they can. Other factors such as a unique business model- so they didn't look like any other CU - and changing over time,not overnight, were drivers cited by ISL. What may be mostinteresting is what factors weren't necessary for a turnaround?Kamm said new charters or fields of membership, or even the economyweren't key factors. Credit Union Times spoke to some of the "nextlevel" 11 CUs to get a more in-depth look at what drove theirsuccess. At ARMs Length "I think just from an overall standpointwe're never quite satisfied where we are. Your starting point isyour starting point, but at the end of the week, end of month, youwant to be better, never be satisfied," said Dan Wollin, CEO of the$90 million P C M Employees CU located in Green Bay, Wisconsin.Wollin's background is in lending, having head up lending for a fewCUs. He's helped the CU get more loans into members' hands. "To dowell in lending you have to try and maintain some simplicity in avery complicated lending world. There are so many regs to complywith, you don't want to make it more complicated than you have tofrom an underwriting standpoint. You do that over time and peopleexpect and demand it." The small CU offers just about any consumerloan. "We are very savings and loan like. We have 55% of our assetsin three-year first ARMs. We have a program that is very simple andlow cost. Even right now with our rates a little higher than whatfixed would be we're still growing," said Wollin. Its loan-to-shareratio is 121%. The CU has about $53 million in mortgage loans, allwithout doing fixed rate mortgages. From June '03 to June '05 theCU's loan portfolio has increased 48%. PCM is a good example of aCU that is succeeding without a growing membership. Its primary SEGis Paper Converting Machine Company, with 900 employees, located inGreen Bay. Another major SEG is an American Express Property andCasualty unit, also in Green Bay and with 700 employees. Other keysto success include being lean and mean. The CU only has one mainfacility, but the location is fabulous, said Wollin. It's in themain retail area in Green Bay about five blocks from Lambeau field,holy ground for Green Bay Packer fans. He said traffic isphenomenal. The only other facility is a 200 square foot buildingin an American Express building. That requires just two employees.Wollin believes success is about the employees. "We have a greatgroup of people who have been here for a long time. I don't haveany turnover, don't have to train a lot and people enjoy doingbusiness with them. I think it's like your insurance agent. If youdon't have a real good relationship with them, as soon as someonecomes in 10% lower on your insurance off you go, if you like themyou trust them and might stay even when a better rate comes along,"he said. The CU has 25 employees and a seven-person board. Wollinsaid he strives to always meet the business plan and five-yearprojections set by the board, and usually does. Changing GearsGoing to the other end of the spectrum, in terms of assets atleast, Credit Union Times checked in with the $1 billion plusTechnology CU located in the Silicon Valley in California.Technology CU CEO Ken Burns starts out with some of the tangiblereasons for the CU's success. "Ten years ago we did a couple ofthings that really helped. We began offering courtesy pay backthen, so we were well ahead of the industry. We also offered `skipa pay' for loans, which were common in teachers credit unions, butnot in traditional credit unions. These two things generated a lotof non-interest income. Probably the third most important was wemoved into mortgage lending in a much larger and sophisticatedmanner," said Burns. Burns said 10 years ago the CU did intensivestudies on ALM and interest rate risk as it applies to mortgages totry to manage risk of more mortgages. "Because we are located inthe Silicon Valley the median price of a home is over $600,000. Ifwe didn't get our mortgages going, we would have missed thattremendous opportunity," said Burns. Seventy-percent of the CU'sloan portfolio is in mortgages, with just one delinquent mortgageon the books. "HELOCs are some of the most profitable loans you canmake, that's been good for us. They adjust with the rising rates,so it assists us greatly in this environment." The CU also keepsits employee number down by not necessarily replacing everyemployee that leaves and by becoming more efficient. "One goodexample is at one point in time about seven years ago we had asmany as 20 loan officers. Because of our automated workflows, we'redown to three," he said. Courtesy pay brings in about $750,000 to$1.5 million a year for the CU. Burns said the CU does notaggressively market it and doesn't think CUs should. "It's been awin-win because they're saving the merchant fees that are tacked onto the additional NSFs. We are assisting members, they're thankfuland at the same time we generate additional non-interest incomethat offsets costs like checking accounts, which are pretty limitedin profitability," said Burns. The `Skip a Pay' program costs amember $35 and allows them to skip a monthly auto payment once ortwice a year. The CU only offers it around the Christmas holidayseason and during tax time, the two most desired times, said Burns.He notes that it's only offered to some members, not all, based ontheir account balances, relationships, etc. Burns, while flatteredby the "next level" designation, said if the study is done a yearfrom now his CU likely won't make the list, and he's fine withthat. The board has decided that the CU will focus more on givingback to the members and as part of that shrink its capital from itscurrent 12% to 11%, and they expect ROA to go from 100-110 basispoints down to 70-80 basis points. "We want to focus less onearnings, putting for less focus on ROA and focus more on our valueproposition to members, giving more back," said Burns. He believesthe board's diversity is key to the CU's success. "We have a VP ofengineering, an attorney, someone who manages his own assetmanagement company, a manager of real estate properties, a VP ofHR. You name the area, we have someone with that discipline," saidBurns. A strong board and board diversity was one common threadfound in the report, and Burns agrees with that, but said you can'tforget about having an energetic, motivated staff. "They makeeverything come together," he said. Indirect Growth At the $769million Rockland FCU in Massachusetts CEO Tom White says indirectlending is a big part of the CU's financial success. "We started it10 years ago and have been fairly successful at it. We did it byourselves. We have relationships with about 100 dealers," saidWhite. The CU has more than $15 million indirect auto loans on thebooks. White also points to strong marketing. "We have given thingsaway, done more direct marketing. We do about four to six mailingsa year to members and people around our branches. We merge a listof our members, with folks who live in our areas," said White. Thishas helped the CU gross about 5,000 new members a year, which windsup to be about 3,000 net added each year. When White joined the CUin 1994 it had 8,000 members, today it has 32,000. White againechoed board diversity as a key. "I have a younger board withdifferent strengths. We have an HR person, a financial planner whohas been very helpful with some of our programs, an attorney andsome come from our SEG groups," said White. When White joined theCU it was in conservatorship, ironically just like the CU he leftwhere he was CFO. "This study was very interesting because we allhave a different story, but there are some common threads," saidWhite. For Tom Sargent, CEO of First Tech CU, that thread has to bethe strategic focus of the CU."I have a global IT leader for Nikeon the board. We have an Internet strategist. Our vice chair iscontroller of Gunderson Steel. They know where we want to go,that's key," he said. "They are very self-policing. If they see aneed on the board they look for someone with that experience. Theylook at demographics. At one point they decided they need to getyounger," said Sargent. Sargent said First Tech's big kick now iseducating employees to sell members the products they need."Sometimes that may not be a credit union product, but that's OK.The idea is to build trust," he said. While known for its techprowess, Sargent made the interesting point that back in 1990 whenFirst Tech came out with home banking it had an advantage. "Todaythe cost has come down as the technology has matured and everyonehas it," he said. Karen Church, CEO of $177 million ELGA CU inMichigan said her number one goal is to get everybody involved inthe success of the members, from the board down. As part of thatthe CU offers employees a rewards program. "Rewards are based onmatching products to the members' needs. We changed name fromincentives to rewards. We're rewarding them for helping members,"said Church. [email protected]