Why do many midsize and small credit unions — actually most of the credit unions in Delaware — thrive (referred to throughout this article as “stars”) while others struggle with declining membership, shriveling assets, and anemic earnings (“meteors”)? This important question is addressed in the Filene report, Thriving Midsize and Small Credit Unions, by Dr. Robert Hoel, Filene Research Institute Fellow in Residence and former executive director.
Dr. Hoel studied 3,390 credit unions in three asset ranges: $10 to $35 million, $35 to $50 million, and $50 to $100 million, over a five-year period beginning in January 2001. In findings published at the end of July 2007, Hoel found that nine factors contributed to excellent performance for credit unions, all of which can serve as a roadmap for any size credit union.
1) Star credit unions are highly effective lenders. Compared to peers and other credit
unions, the loan-to-share ratios are higher. They make more loans in almost all loan categories than peers.
2) Their members use their credit union extensively. The number of transaction accounts per 100 members, savings accounts and loans are higher at the thriving credit unions than peers. Average-dollar values of savings and loan balances are also higher.
3) They pay members higher rates for savings than similar-size credit unions. Because they generate more loan and fee income, they are able to pay higher rates. Their savings rates attract deposits and asset growth soars.
4) They emphasize high payoff products and services. Star credit unions are successful in growing used car and mortgage portfolios. Compared to peers, a large portion of their members have checking accounts. Meteors rely on traditional share accounts; stars compete for more price-sensitive share certificates or money market funds.
5) They manage their expenses aggressively. Operating expenses at stars are much lower than their peers. Thriving credit unions employ fewer staff per-million in assets and per thousands of loans generated, and their compensation and fringe costs are less. They have lower office operations and occupancy expenses.
6) Their high deposit and loan balances per member cut their operating costs. High average deposits and loan balances are powerful tools for lowering expense ratios. Stars are successful in persuading members to place large portions of their savings and loans at their credit union.
7) They do not rely on solely on low loan rates to generate loans. Stars often don't have substantially lower loan rates than their peers. Instead they offer convenience, speed and good service. They are aggressive loan marketers.
8) They generate more fee income than their peers. Because large numbers of their members use the credit union's checking account products and other fee products, fee income is relatively high.
9) They invest their capital in growth. Rather than building excessive capital as some credit unions do, stars invest in expanding their membership, increasing product and service offerings, and growing their assets and loan portfolios. They deliver member value while maintaining adequate net worth levels.
This report can be purchased at www.filene.org. Click on “Publications” and select the appropriate title. The League also has a copy in our lending library, which can be borrowed by contacting education director Bernadette Hines.
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