One differentiator of credit unions to other financials is the boards are made up of volunteers.
That's good and bad. It's good because directors are credit union members and ideally they are looking out for their fellow members with any decisions they make. Big banks on the other hand often bring in high-profile leaders who are well known in business and may be more interested in driving profits, rather than getting the bank's customers the best deal. Then again, business leaders can also bring innovative perspectives that the average credit union director might not.
Given the flood of credit union-to-bank conversions in recent years, there has been a lot of talk about a credit union director's fiduciary responsibility. It's where the rubber meets the road of being a director. Directors don't get paid, yet these volunteers don't get a volunteer break on fiduciary responsibility either. They can be held as accountable as bank directors. So credit union directors in a sense are putting their necks on the line for not much reward, unless of course building a successful credit union that betters the financial lives of its members is reward enough–fortunately that is the case for many directors who live the credit union philosophy.
But let's get realistic. Would directors really be willing to put their own personal financial lives on the line for the credit union if they really understood the potential for personal loss? It's dicey, unless of course the directors have a high credit union IQ and know what they're getting into and more importantly, what they're looking for as a director. That's where it gets a little sticky.
It is no revelation that there are many credit unions out there that aren't performing well right now. They have rising delinquencies, membership growth is nonexistent, and they are losing money or breaking even at best. Yet many of these credit unions have had the same CEO for years. Who is watching? Shouldn't the board be calling out these CEOs on the CU's poor performance? They should, but are they?
These are clearly cases of boards being comfortable with the longtime CEO. Whether it's a few good conferences each year, a dedicated parking spot, or hearty meals at the monthly board meeting, the CEO might be particularly adept at keeping directors happy. I'm not saying this type of CEO is doing anything illegal or breaking any regulations, but knowing how to work the board may get the CEO a pass on the CU's lackluster performance. Boards can't view the CEO as that old comfortable chair that just feels right if the numbers aren't there. It is their fiduciary responsibility to look at the numbers, understand them and question performance. They must of course take into account market conditions, and other factors.
So what should boards be looking for? The obvious biggies that could reveal problems are net worth, delinquencies and charge-offs. These are the numbers that could cause a board to drill down to a bigger story. Growing charge-offs could indicate a weak link in the credit union's indirect lending chain that is causing losses. There could be a dealership that isn't adhering to the CU's underwriting standards. Boards can't rely on the third-party indirect lending firms to police this, it is each CU's responsibility and as we've seen recently, indirect lending is not without its pitfalls. If directors don't understand this, they may not ask the right questions.
There's operating expenses. Is the management managing well to a tight margin market? Maybe the credit union should reconsider leasing out part of its facility. Are shares and loans being priced accordingly to keep cost of funds at a reasonable level? Credit unions that leave lofty deposit rates on the books in a declining rate environment may be doing more harm than good to their members in the long run.
Loan growth and member growth should be examined. Boards that don't know which loan categories are growing and declining, or how many members are being added or lost each year aren't seeing the full picture. Lending is where credit unions make the most money, so it should always be a category for directors to monitor. Credit unions everywhere are having trouble adding new members. Does the CEO have a plan to fight this trend? Maybe more marketing dollars should be allocated to drive membership growth.
Another area is investments. Is the investment portfolio performing well? Keeping too much money in a corporate overnight account could be costing the credit union. Does the credit union have a structured investment ladder that goes out further than a year? Many credit unions don't.
Is non-interest income at a healthy level? Some credit union leaders associate non-interest income negatively because it is in essence, fees. Wake up. Credit unions need new non-interest income streams to stay competitive, especially in this market. That doesn't mean they have to charge bank-like fees, but they should look at new services that bring in non-interest income.
Board members can't be expected to be Bill Hampel, with the ability to slice and dice numbers a million different ways, but they need to know that numbers do tell a story and it is their fiduciary responsibility to understand the story. It is the CEO that must be able to explain the numbers behind the story. –Comments? E-mail pgentile@cutimes.com
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