Small and Mid-Size Credit Unions Finding Ways to Thrive with Existing Members
LAS VEGAS -- In a time when membership growth has been declining, successful small and mid-size credit unions have been able to mine additional value from existing members.
Small and mid-size credit unions, short of merging, need to figure out how to do more to remain relevant in the market. "Economies of scale have been going away," CUNA Economist Mike Schenk said. Credit unions need to reach $300 million these days to get any real benefits of scale.
However, Bob Hoel of the Filene Research Institute said there are some shining "stars" among smaller credit unions that have a number of traits in common. First, they take advantage of credit unions' "golden goose"--loans. They have very high loan-to-share ratios and "manageable" charge offs. "I'm a loan nut," he admitted.
Hoel also put an emphasis on high-payoff products. Used car loans are a good example, he said because "people are not so upside down so quickly."
He also explained how one $50 million credit union was taking advantage of short-term first mortgages for its aging membership by offering five- to nine-year mortgages at no fee that closed quickly. The loan-to-value ratio on these mortgages was 41%. "Was that good collateral? These people aren't leaving town," Hoel pointed out.
He also found that these credit unions do not rely solely on rates. They offer convenience, speed, good service, aggressive marketing, and cross-selling.
The members of these star credit unions used it extensively with more transaction accounts, savings accounts and loans per thousand members than others due to cross-selling, he said. They also had higher average savings and loan balances.
These credit unions also tend to pay higher savings rates, emphasizing CDs and money market funds while managing expenses aggressively with low operating cost ratios, fewer employees, and lower compensation and fringe costs, office operation expenses, and occupancy costs.
Hoel said they have also focused on the denominator of the expense ratio by adding assets. Credit unions have cut costs about as much as they can at this point, but by manipulating assets the ratio can move down. For easy math, he said, assuming six members per $100 in assets, credit unions should try to work toward six members per $200. "Operating expenses will not change much if you get that $100 from existing members," Hoel said. He pointed to one smaller credit union that has $31,000 per member, but a 2% expense ratio because of it. "Look at the
denominator and figure out how to get the deposits up," he stated.
The stars also generate more fee income through high penetration on checking accounts and other fee-generating products.
Finally, they do not hold onto to excess capital, but instead invest it in growth of membership, product and service offerings, and growing portfolios.
"Our members are not bringing their money to us and they love you. That is what's really scary," Hoel concluded. Filene will be officially releasing its study in the next couple of weeks.