By Doug Wadsworth
Every few years I gather financial data on the small CUs around me and throw it into a graph. Typically, I just compare the ROAs to see where I stand, but last time I looked at net worth ratios, too. Then I compared the two graphs.
Why? Well, this time I was curious whether I could tell which small credit unions were struggling, and which might be “hoarding.” Laying the graphs on top of each other, was eye-opening.
Why do I care? Well, I’ve recently become more passionate about helping small credit unions survive, because the current trajectory is concerning. I have been the CEO at my small CU for 17 years, and I see the unique value we offer to our members and community, especially for minorities and the underserved. I want to make sure we are still around in 10 years!
Two Drivers of Failure
While businesses fail for a variety of reasons, surely two primary drivers are: 1) A growing regulatory compliance burden, and 2) Growing competitive pressure. Increasingly, small credit unions seem to be losing members and loans to large credit unions, rather than just banks. We don’t like to talk about it because it doesn’t feel very “cooperative,” but if small CUs are to survive we need to somehow differentiate ourselves from all big institutions (without being divisive).
How? I suggest we “give back” to our members more radically than anyone else. Since we aren’t spending money on more branches, we can afford to make that a higher priority–s credit unions were intended to!
Lessons From the Frog
How can you know when you might be “hoarding” your member’s money? When are your ROA and NW ratios “too high?” Like frogs in boiling water, as we get healthier our “comfortable minimum” keeps increasing, too.
“Well, board of directors, I know that three years ago I said that a 12% NWR was plenty, but now I think we should have at least 13%, or 14%, or 15%…”
Who will tell you when you are hoarding? Every credit union is different and there may be factors that are not apparent just by looking at financial ratios. Regulators will never tell you when you are hoarding, because their priority is risk reduction. Have you heard stories of millionaires who live in squalor, because they can’t bring themselves to spend their money?
A Difficult Sacrifice
Sacrificing some of your profitability is incredibly difficult to do. As CEOs, we are wired to make sure our businesses become increasingly healthy and profitable. We love it. Our regulators love it. Our board members love it, and we get paid more!
However, if we want to differentiate ourselves from “big banks” and survive another decade, I think we need to be even more awesome – and make sure we aren’t hoarding those profits!
My board and I decided a few years ago that an ROA exceeding 1% with a NW ratio over 13%, was when we should start giving more back to members. How did we give more back? We ended our NSF fees completely. We dropped our loan rates lower than anyone else and we increased our regular dividends to be arguably the best in town.
If our NW ratio and ROA continue to grow, we will become even more awesome by giving more back next year!
The Need for Coordination
Now, obviously, strategically sacrificing your ROA by giving more back to members, should be coordinated with your board of directors, because if your salary is based on those ratios you don’t want to get rewarded with a pay cut (for more successfully fulfilling your credit union mission).
In summary, small credit unions can be an incredible source for good in our communities, but if we want to stay around another decade, I think we need to stay relevant by being even more awesome than ever before, by giving profits back to members, not hoarding them!
If you are interested in hearing more of my ideas and experience, check out my new book on Amazon: Keep it Simple, CEO, a DIY Profitability Guidebook for Small Credit Unions.
Doug Wadsworth is CEO of Tri-CU Credit Union in Kennewick, Wash. He is also the president of a new non-profit advocacy group for small credit unions, the Endangered Small Credit Union Defense. He can be reached at [email protected] or on LinkedIn here.
One Response
An important distinction regarding possible “hoarding.” It’s probably only a concern when you stably have both a strong ROA and an increasing NW Ratio. At the same time, if you can’t stop your assets from decreasing, that will “artificially” inflate your NW Ratio. What to do then? It might be time for a strategic paradigm shift with that excess capital…as a better option than just becoming increasingly less relevant until you go out of business with a ton of capital that was never given back to members (if you do it right, giving more back to members may just kickstart your growth again)?
-Doug Wadsworth