WEST PALM BEACH, Fla. - Most keen observers of the industry can pick out your high-flying credit unions. These are credit unions that perennially top rankings and listings for things such as loan growth, ROA, asset growth, new members, etc. But at some point, not even these perennial winners were high-fliers, so how did they get there? An intriguing report, entitled "Taking it to the Next Level" identifies 11 CUs that went from relatively average performance to becoming standouts. "We were trying to look at credit unions that have made a move to a higher level of performance and sustained it over 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 done by the Institute for Strategic Learning, a consulting firm based in Naperville, Ill. ISL provides strategic planning and other consulting services for CUs and other industries. ISL evaluated 1,711 CUs with assets over $50 million from the years of 1992 to 2002. ISL used net income as its barometer so to speak. It looked at these 1,711 CUs and compared net income of each of them compared to the average net income of a similar sized CU for that period. First it needed to find average CUs, so it identified CUs that for a period of three years or more had net income that was at or below 1.25 times the average. Then to find those CUs that made a turnaround, it looked for CUs that had a period of five or more years where ROA was 1.25 times the average, thus finding your new high-fliers. In the end 11 CUs made the list (see listing page 1). Kamm said what was interesting is that the list of 11 is diversified in so many ways. "They aren't all big, aren't all medium, aren't all small. They vary in geographic region. One could look at this and expect credit unions in areas that were economically 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 the small market of Green Bay, Wisconsin and another from an area of Michigan that had tough economic times. The study cites a few common threads among these CUs. First, it said each had a clearly identified "central strategic focus", where it didn't seek to be all things to all people. Next these CUs had "created their own future" in that their strategic plans were not set by crisis or other problems, but a desire to carve their niche. The CUs also took care of home first, meaning they mined their existing FOMs and markets, while other CUs sought to grab the biggest charter expansions 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 most interesting is what factors weren't necessary for a turnaround? Kamm said new charters or fields of membership, or even the economy weren't key factors. Credit Union Times spoke to some of the "next level" 11 CUs to get a more in-depth look at what drove their success. At ARMs Length "I think just from an overall standpoint we're never quite satisfied where we are. Your starting point is your starting point, but at the end of the week, end of month, you want 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 few CUs. He's helped the CU get more loans into members' hands. "To do well in lending you have to try and maintain some simplicity in a very complicated lending world. There are so many regs to comply with, you don't want to make it more complicated than you have to from an underwriting standpoint. You do that over time and people expect and demand it." The small CU offers just about any consumer loan. "We are very savings and loan like. We have 55% of our assets in three-year first ARMs. We have a program that is very simple and low cost. Even right now with our rates a little higher than what fixed would be we're still growing," said Wollin. Its loan-to-share ratio is 121%. The CU has about $53 million in mortgage loans, all without doing fixed rate mortgages. From June '03 to June '05 the CU's loan portfolio has increased 48%. PCM is a good example of a CU that is succeeding without a growing membership. Its primary SEG is Paper Converting Machine Company, with 900 employees, located in Green Bay. Another major SEG is an American Express Property and Casualty unit, also in Green Bay and with 700 employees. Other keys to success include being lean and mean. The CU only has one main facility, but the location is fabulous, said Wollin. It's in the main retail area in Green Bay about five blocks from Lambeau field, holy ground for Green Bay Packer fans. He said traffic is phenomenal. The only other facility is a 200 square foot building in an American Express building. That requires just two employees. Wollin believes success is about the employees. "We have a great group of people who have been here for a long time. I don't have any turnover, don't have to train a lot and people enjoy doing business with them. I think it's like your insurance agent. If you don't have a real good relationship with them, as soon as someone comes in 10% lower on your insurance off you go, if you like them you trust them and might stay even when a better rate comes along," he said. The CU has 25 employees and a seven-person board. Wollin said he strives to always meet the business plan and five-year projections set by the board, and usually does. Changing Gears Going to the other end of the spectrum, in terms of assets at least, Credit Union Times checked in with the $1 billion plus Technology CU located in the Silicon Valley in California. Technology CU CEO Ken Burns starts out with some of the tangible reasons for the CU's success. "Ten years ago we did a couple of things that really helped. We began offering courtesy pay back then, so we were well ahead of the industry. We also offered `skip a pay' for loans, which were common in teachers credit unions, but not in traditional credit unions. These two things generated a lot of non-interest income. Probably the third most important was we moved into mortgage lending in a much larger and sophisticated manner," said Burns. Burns said 10 years ago the CU did intensive studies on ALM and interest rate risk as it applies to mortgages to try to manage risk of more mortgages. "Because we are located in the Silicon Valley the median price of a home is over $600,000. If we didn't get our mortgages going, we would have missed that tremendous opportunity," said Burns. Seventy-percent of the CU's loan portfolio is in mortgages, with just one delinquent mortgage on the books. "HELOCs are some of the most profitable loans you can make, that's been good for us. They adjust with the rising rates, so it assists us greatly in this environment." The CU also keeps its employee number down by not necessarily replacing every employee that leaves and by becoming more efficient. "One good example is at one point in time about seven years ago we had as many as 20 loan officers. Because of our automated workflows, we're down 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 not aggressively market it and doesn't think CUs should. "It's been a win-win because they're saving the merchant fees that are tacked on to the additional NSFs. We are assisting members, they're thankful and at the same time we generate additional non-interest income that offsets costs like checking accounts, which are pretty limited in profitability," said Burns. The `Skip a Pay' program costs a member $35 and allows them to skip a monthly auto payment once or twice a year. The CU only offers it around the Christmas holiday season and during tax time, the two most desired times, said Burns. He notes that it's only offered to some members, not all, based on their account balances, relationships, etc. Burns, while flattered by the "next level" designation, said if the study is done a year from now his CU likely won't make the list, and he's fine with that. The board has decided that the CU will focus more on giving back to the members and as part of that shrink its capital from its current 12% to 11%, and they expect ROA to go from 100-110 basis points down to 70-80 basis points. "We want to focus less on earnings, putting for less focus on ROA and focus more on our value proposition to members, giving more back," said Burns. He believes the board's diversity is key to the CU's success. "We have a VP of engineering, an attorney, someone who manages his own asset management company, a manager of real estate properties, a VP of HR. You name the area, we have someone with that discipline," said Burns. A strong board and board diversity was one common thread found in the report, and Burns agrees with that, but said you can't forget about having an energetic, motivated staff. "They make everything come together," he said. Indirect Growth At the $769 million Rockland FCU in Massachusetts CEO Tom White says indirect lending is a big part of the CU's financial success. "We started it 10 years ago and have been fairly successful at it. We did it by ourselves. We have relationships with about 100 dealers," said White. The CU has more than $15 million indirect auto loans on the books. White also points to strong marketing. "We have given things away, done more direct marketing. We do about four to six mailings a year to members and people around our branches. We merge a list of our members, with folks who live in our areas," said White. This has helped the CU gross about 5,000 new members a year, which winds up to be about 3,000 net added each year. When White joined the CU in 1994 it had 8,000 members, today it has 32,000. White again echoed board diversity as a key. "I have a younger board with different strengths. We have an HR person, a financial planner who has been very helpful with some of our programs, an attorney and some come from our SEG groups," said White. When White joined the CU it was in conservatorship, ironically just like the CU he left where he was CFO. "This study was very interesting because we all have a different story, but there are some common threads," said White. For Tom Sargent, CEO of First Tech CU, that thread has to be the strategic focus of the CU."I have a global IT leader for Nike on the board. We have an Internet strategist. Our vice chair is controller of Gunderson Steel. They know where we want to go, that's key," he said. "They are very self-policing. If they see a need on the board they look for someone with that experience. They look at demographics. At one point they decided they need to get younger," said Sargent. Sargent said First Tech's big kick now is educating 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 tech prowess, Sargent made the interesting point that back in 1990 when First Tech came out with home banking it had an advantage. "Today the cost has come down as the technology has matured and everyone has it," he said. Karen Church, CEO of $177 million ELGA CU in Michigan said her number one goal is to get everybody involved in the success of the members, from the board down. As part of that the CU offers employees a rewards program. "Rewards are based on matching products to the members' needs. We changed name from incentives to rewards. We're rewarding them for helping members," said Church. [email protected]