Best Practices
Credit Union Advisor, 2008 Winter


We are pleased to once again share some thoughts with you — the leadership of your credit union. It is abundantly clear that successful leadership involves strategic thinking and a continual focus on doing things better. It is to this degree that we challenged ourselves to find a few best practices that might serve as a starting point to challenge you to think strategically on ways to continue the growth and expansion of your credit union.

Who’s Your “Peer”?

Most credit unions from time to time will compare themselves to their peers to see how they measure up in numerous areas. Best practices in this area involve comparing yourself not to your peer averages (who wants to be average?), but to the “best in class,” or even credit unions in a larger asset class where you are striving to grow.

Centers of Excellence

Strong-performing credit unions spend time considering and knowing their “centers of excellence” — areas they are either very good at or that they consider critical. Within all other areas of the credit union, they consider the level of effort needed to sustain the activity and determine whether the effort is worth the benefit of the activity. If they deem the effort unworthy, decisions can be made on whether these areas can be eliminated or possibly outsourced to reduce costs.

Non-traditional Branches

Almost unheard of several years ago, a new concept is developing in which credit unions open with staff branches that are considered “less than full-service.” Depending on the location and needs of members potentially utilizing the branch, services can be tailored to each location. One example could be operating “cash-less branches.” These branches might have two or three MSRs and an ATM. These MSRs can take in loan applications and help open accounts. If a member comes in and needs to cash a check, the MSR can assist them with using the ATM. If the member wants to transfer funds between accounts, the MSR could show and teach the member how to utilize online account access.

Checking Rates

Often overlooked in a rate strategy are the rates offered on lower-balance checking. While it may be tempting to take these lower balances for granted, best practices have shown that offering

premium rates on checking accounts can attract members who heavily utilize transaction-based accounts. Increased transactions could increase fee/transaction revenue without costing the credit union too much in interest expense. When premium rates are offered on certificates of deposits, many times the result could be “hot deposits” whereas higher rates on checking could lead to a longer term membership relationship.

Home Equity Portfolio Risk

When evaluating the overall credit risk within a home equity portfolio, it can be difficult to size up the amount of risk in situations where the credit union holds the home equity line of credit (HELOC), but not the primary mortgage. The first step is to be able to segregate these loans into their own population and assign responsibility to monitor these loans. Some credit unions will regularly rerun FICO scores on these members in an attempt to identify declining credit-worthiness.

Evaluate Charge Offs

How much time does your credit union spend analyzing charge offs and looking for common characteristics among these loans gone bad? Beyond knowing the reason for charge off (i.e., bankruptcy, job loss, etc.), many credit unions don’t adequately evaluate their losses. Knowing specific factors on charged-off loans can strengthen future underwriting practices. For example, best practices include tracking charge offs by originating loan officer, originating branch, car dealership initiating the indirect loan, mileage levels on used vehicles, etc. One credit union found a significantly higher level of charge offs once cars reached 75,000 miles. Coincidence — maybe, but interesting information to pay attention to for sure.

Are You Ready for the Mortgage Re-Fi Boom?

According to data accumulated by First American Real Estate Solutions, approximately 7.7 million adjustable rate mortgages worth $1.888 trillion were originated during 2004 and 2005. Of these loans, approximately 18 percent had initial rates of less than four percent and an additional 39 percent had rates between four and seven percent. The remaining 42 percent had even higher interest rates. Considering a normal amortization and re-pricing schedule, the highest re-pricing volume periods are expected to come during the first half of 2008. Many of your members or potential members may fall into this group. As their loans re-price, often at higher rates, they may be looking to refinance these loans. Does your credit union have products available, and are you heavily marketing these to your members during this relatively short period of unusually high expected volume? This could be a great time to increase your share of your members’ real estate loans.

Right-size Your Leadership Team

When determining the correct number of executives or members of your management team, your long-term strategy can give valuable clues on your potential structure. Is your credit union launching into a rapid-growth period, or are you planning on significant new product development? Such a strategy warrants carrying a larger management team. However, if your credit union’s strategy involves maintaining, or only slight growth, the size of your management team should be smaller. The cost savings will facilitate maintaining your financial performance in times of shrinking margins. Whatever your course, your long term strategy should be reflected in future staffing decisions.

Managing the Forclosure Process

In the wake of the subprime mortgage lending crisis, some lenders have found themselves managing mortgage credit risk on the back end of the lending cycle via the foreclosure process. For credit unions, which are driven by their principles to enable and enrich the lives of their members, your first objective is to proactively identify and counsel members who may be at risk of foreclosure.

However, if foreclosure is necessary, be certain your institution has a formalized foreclosure process in which management:

• Understands foreclosure laws of the states in which you operate
• Is cognizant of the extra costs of carrying foreclosed property
• Is able to derive a realistic estimate of a property’s true market value
• Is appropriately staffed to handle/manage multiple ORE properties
• Can optimize property foreclosures (and risk) relative to prudent liquidity and cash flow management

A formalized foreclosure process is factually absent of emotion and well documented (supported by calculations).