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Secrets of High-ROA Credit Unions

BEST PRACTICES:

PProfitability is a good thing. However, seeking prof-its exclusively is out of character in the credit union community. While it’s certainly fair to consider prof-it when making decisions about staffing, products, services, and more, for credit unions, profit alone shouldn’t drive service decisions.

As Steve Higginson, CEO of Reliant Federal Credit Union in Casper, Wyo., says, “If we as an industry forget serving members to chase higher earnings, haven’t we become just like a for-profit bank?”

Higginson and other credit union executives recog-nize profitable credit unions can give back more to members through higher deposit rates, lower loan rates, lower and less frequent fees, and ultimately dividends.

Profitable credit unions also have the flexibility and the resources to offer rate specials to attract deposits or bolster growth in a particular part of their lending portfolios. Profitable credit unions can add or update branches, reward and retain staff, offer desirable products and services, and weather difficult econom-ic conditions without diminishing member satisfac-tion. So credit unions that can serve member needs while growing profits have struck a rare, delicate, and desirable balance.

There isn’t one path to profitability, no sure-fire product or fee to adopt that will make all the differ-ence. Rather, profitable credit unions focus specifical-ly on member needs. They determine either formally or informally what members want and need. Then they act on those wants and needs. One component of profitability is return on assets (ROA).

Credit unions with high ROA are disciplined. They lend out as much money as they can, yet they also avoid the temptation of reacting too quickly to changes in interest rates or to promotions from

competitors. They plan for the short and long term, and they alter pricing based on their stated goals and objectives—not on the actions of the bank around the corner. Many consider in advance how they’ll handle competition or face a recession.

High ROA credit unions value their employees and understand that low turnover can affect earnings. They use fees fairly yet strategically. Most of all, they don’t try to be all things to all people.

Finally, credit unions with high ROAs also have an eye on spending. They find savings through ven-dor contract negotiations and sometimes through employee incentives. They avoid cost-cutting mea-sures that negatively affect member service or satis-faction. Sometimes they decide to offer loss-leader products that don’t pay for themselves, or to make substantial investments in infrastructure (namely branches) that are costly but essential to meet mem-ber needs and to sustain growth. They plan for peri-ods of greater spending, when ROA will dip a bit, with confidence that earnings will return after a loan or deposit promotion has ended or a branch has been renovated. Most set specific ROA targets, but most of the credit unions featured here aren’t driven by num-bers as much as by members. All say their profitabil-ity is a byproduct of exceptional service.

It’s inspiring to know there’s practically no credit union too small nor too troubled to improve its ROA. And it’s refreshing to learn that staunch adher-ence to credit union philosophy and member service can be the surest path to profitability.

Mark CondonSenior Vice PresidentCUNA’s Center for Research & Advice

BEST PRACTICESReturn on Assets2

Publisher’s Note


Table of Contents

Written by Jennifer Garrett

To order a downloadable PDF, visit buy.cuna.org and enter 28478P into the product finder.

© 2008 Credit Union National Association

Settlers Federal Credit UnionFrom Recovery to Record ROA

Universal Credit UnionNiche Success

Fort Dodge Family Credit UnionStrategic Lending and Fees

Union Fidelity Federal Credit UnionKnow Your Members

Michigan State University Federal Credit UnionIntangibles Lead to Earnings

Reliant Federal Credit UnionPlanning for Profit

Cedar Point Federal Credit UnionLong-Term Profitability

Whatcom Educational Credit UnionProfitability hrough Presence

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1IIn 2007, Settlers Federal Credit Union had a return on assets (ROA) of 2.87%, the second highest of all 360 credit unions in Michigan. From 2002 to 2006, the credit union’s ROA averaged 2.36%, which placed it annually in the state’s top five. Yet just eight years ago, Settlers Federal’s numbers were so grim that it was on the brink of forced merger or failure.

“We had extremely low earnings,” says Diane Moilanen, CEO of the $10 million asset credit union in Bruce Crossing, Mich. “We were a very shaky credit union being told to merge in order to survive.”That was the message from the National Credit Union Administration and state regulators. Yet the Settlers Federal board of directors was reluctant to give up on one of Michigan’s oldest credit unions. Instead, the directors decided to find a way to turn the credit union around.

It wasn’t easy. Regulators enumerated mandatory goals Settlers Federal had to reach in order to remain independent. The goals were realistic and achievable, Moilanen says, but nonetheless challenging and

certainly non-negotiable.

“One item we had to address was to restore our capital-to-asset ratio to show we could be profitable,” Moilanen explains. “In 2000, our capital-to-asset ratio was less than 4.5%. Today it’s over 14.5% even after build-ing a new main office and nearly tripling our assets.”

The forced merger obviously never happened, but it took new management, new fees and products, and a new team attitude to turn a foundering credit union into a flourishing one.

New managementNew management was necessary to achieve the changes required to keep Settlers Federal alive. Moilanen, a former banker, was a key part of the recovery plan. When the board hired her in 2000, it caused a stir in the small community in Michigan’s Upper Peninsula.

“We’re a small town in a rural area, and when anything happens, it’s news,” Moilanen says. “The change in management got people talking about the credit union. For some people, that’s when they real-ized we had a credit union.”

Moilanen wanted to harness that attention and use it to both attract new members and restore confidence among its existing membership. She joined boards and committees. When asked to volunteer, she said yes. She became well acquainted with her communi-

Settlers Federal Credit Union From Recovery to Record ROA

Settlers FCU at a Glance• Assets: $10,442,458

• Members: 2,686

• Capital to assets: 14.48%

• Yield on average loans: 9.57%

• Yield on investments: 4.07%

• Cost of funds: 1.99%

• Return on assets: 2.07%

5 BEST PRACTICESReturn on Assets

ty, and more important, the community became well acquainted with her. “The better people know you, the more they have faith in you,” she says. “The more faith they have in you, the more faith they develop in the credit union.”

Along with raising her profile, Moilanen had finan-cial housekeeping to tend to. She immediately began working with regulators and other credit union CEOs, all of whom were instrumental in bringing Settlers Federal back to profitability. “It was a joint venture turning this credit union around,” she says. “Everyone helped, especially the regulators. They determined what we needed to achieve, monitored our progress, and guided us when we needed help.”

Moilanen was the first to acknowledge she needed some help. She was eager to prove herself in her new role, but there were many areas of credit union management that were new to her. Unwilling to be derailed by pride, Moilanen admitted when she didn’t know something and turned often to state and NCUA regulators for guidance. “Because I was never a CEO at a bank or credit union, I didn’t have the expertise in a lot of areas,” she says. “The regulators even had to teach me how to calculate a net worth and delinquency ratio.”

What Moilanen lacked in experience, she made up for in resourcefulness, tenacity, and leadership. She ferreted out not only guidance, but also innovative funding sources, including multiple NCUA grants for equipment. More important, Moilanen applied for and secured certification for Settlers Federal as a Community Development Financial Institution (CDFI). The certification, which can unlock up to $300,000 in federal grant dollars, is available to eli-gible credit unions serving people of modest means or without access to services of traditional financial institutions.

Fair feesLike most credit unions, Settlers Federal sets most fees high enough to cover the cost of products and services but low enough to beat competitors. For example, while overdraft fees generate income, over-draft protection for members is available in automatic transfers from savings or credit lines at no cost. The credit union doesn’t offer payday lending products, which can generate revenue, because Moilanen fears they would get members deeper into trouble, which ultimately would hurt the credit union.

Earnings by savingIn addition to fees, Moilanen says she constantly reviews contracts and expenses to find savings oppor-tunities. “Before I look at where I can make money, I look at where I can save money,” she says. Our loy-alty is to our members, not our vendors,” Moilanen says, explaining her willingness to consider other options whenever a contract comes due for renewal. “We’re in control of everyone’s money here, and I want it to go to the right spot.” She also evaluates products and services to make sure they’re as effi-cient as possible. For example, one of Moilanen’s first changes was to incorporate a new data processing system in order to get faster reporting and on-time information so credit union staff could make more efficient business decisions.

Evaluating product line-upSettlers Federal has added more products and services than it has eliminated. But Moilanen, along with her board and staff, continually scrutinize products and services to determine whether they’re profitable and/or essential to membership. The most activity—and increased profitability—has come from new products.Based on a suggestion from one regulator, the credit

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union began offering home equity lines of credit (HELOC). That has had a huge impact on earnings, Moilanen says. Before launch, she did her homework to make sure the product would be successful. She worked with the board to tweak existing lending policies, and she visited other financial institutions offering HELOCs to determine what forms they used, when they repriced, and how they managed their programs.

Another key to improved profitability was offering a Platinum Visa card. Moilanen says members feel an extra layer of protection against identity theft and fraud since the cards are issued locally, and they cer-tainly appreciate the rewards program. “This is a day and age when people want more bang for their buck,” Moilanen explains. “You’ve got to be competitive, so our members can earn points with our credit card just like any national issuer’s.”

New attitudesA long list of changes has brought Settlers Federal from the brink of folding all the way to growth and profitability, but Moilanen credits attitude as much as anything. She says her own willingness to trust

regulators and to work directly with them helped the credit union get on the right path. “They’re a great resource,” Moilanen says. “They go into more credit unions than anybody else. They see what’s done right and what isn’t.”

The other key component was bringing her can-do attitude to her staff. Moilanen says the board and employees deserve as much credit as she does. “I might be steering the ship, but you can’t sail a ship alone,” she says. “Everyone plays a crucial role from the janitor on up.”

ResultsThe credit union is celebrating its 76th anniversary in a brand-new building, and Moilanen is watching earnings with the hope Settlers Federal will be able to pay an additional cash dividend to members next year–something that hasn’t been possible since long before she came to the credit union. “Our members are the ones that earned it, and if we don’t need it, we want to give it back,” she says. “On the other hand, we want to be there for them tomorrow, so we’ve got to make sure we’re as financially strong as possible. It’s a fine line.”


UUniversal Credit Union’s strategy is simple: Don’t try to be everything to everyone. The $1 million asset credit union has fended off merger pressure by remaining profitable despite its small size and mem-bership base. And the Independence, Kan., credit union does it by focusing on a narrow but valuable list of products and services that its 300 members need, know, and use.

“We can’t offer all the services,” says manager Laura Keller. “We can’t compete. So when a member comes in and wants a $40,000 car, we tell him that he can go down the street for a better rate.”

Turning members away may sound like a strange strategy, but Keller explains that “everybody can’t play with the big boys.” Yet larger credit unions and other financial institutions “sometimes don’t want to be bothered with the small loans. Sometimes they don’t want to get to know their customers. We want to do that. We’re very comfortable in that position, and I think there will always be a need for that ser-vice,” she says.

Universal serves employees of Buzzi Unicem USA, a local cement plant that has been a part of the Independence economy for generations. It’s a small community, and every-one knows someone who works at the plant. Keller knows most everyone.

“We’re almost like family with our members,” she says. “We talk about kids, school, their soccer games. We’re a very close-knit group.”

Limited selectionUniversal offers little beyond loans, mostly personal and used-vehicle, and shares. Most of the loan terms are 36 months. The longest is 60 months. Universal doesn’t handle mortgages or home equity lines of credit. If members need something Universal doesn’t provide, Keller will refer them to another provider. Coincidentally, Universal gets just as many referrals as it gives.

The small-town cooperation and collaboration ben-efit everyone, Keller says, and she doesn’t feel any threat from competition. By looking out for mem-bers and sending them where they can get the best value, Universal builds trust. So when Keller or other employees tell members they think a particular loan or term is in the member’s best interest, the member is inclined to agree.

“We have a very, very loyal group of members,” Keller says. “When they do the big-ticket items, we know they’re going somewhere else. We even try to

Universal CU at a Glance• Assets: $1 million

• Members: 300






2Universal Credit Union Niche Success


help them decide where to go. But when it comes to small loans—vacations, help with bills—they come to us.”

AttitudeKeller genuinely cares about her members and the community as a whole, and her membership knows it. Keller usually hears about it when members get into a pinch. They come to her and talk frankly about

what’s going on and ask what she can do to help. Keller, too, is straightforward with them. Sometimes there are options. Other times there aren’t. But she always does whatever she can. “We’ll say you’ve got to raise your payroll deduction a little bit, and they’ll do it. We’ll say you need a shorter term, and they’ll do it,” she says. “Our members reciprocate. They really try to work with us.”

As a result, members come to Universal first for their personal and used-vehicle loans. Delinquency rates are low because of conservative lending and the sense of loyalty and duty that runs between the credit union and its members.

Profitability is high given the size of the credit union because shares are loaned out and operations are lean. That’s really all there is to it. Disability insur-ance is the only offering that carries a fee. Expenses are largely fixed at Universal, which shares a build-ing with another credit union to keep costs low. It’s a formula for success that has worked for Universal during strong and weak economic times.

“When I took over the credit union 20 years ago, no one thought we would be able to stay. Everyone thought we would have to merge. But we hung onto our membership base and tried to give them what they needed,” Keller says. “I really feel in my heart that there is a place for the small credit union to help those individual members.”

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LLike most credit unions, Fort Dodge Family Credit Union isn’t profit-driven. Member service comes first for the $10 million asset credit union in Fort Dodge, Iowa, that serves Fort Dodge Animal Health and Nestle Purina PetCare employees and their families. There are no investments on the books. The 2,500 members are mostly blue-collar factory work-ers with decent salaries but who live, for the most part, paycheck to paycheck.

Yet Fort Dodge Family is profitable. Manager Julie Pingel credits a high loan-to-share ratio, usu-ally between 85% and 95%, for much of the credit union’s success. The adoption of risk-based lend-ing has increased the yields from the loan portfolio. Also, a strategic but restrained use of fees generates income without compromising member service.

High loan-to-share ratioThe key to profitability at Fort Dodge Family, Pingel says, is the credit union’s high loan-to-share ratio, and the key to the high loan-to-share ratio is mem-ber service.

“We’ve never really had a prob-lem with income,” Pingel says. “I know there are credit unions out there that do struggle, but I guess we don’t because the member service is always there. We work with our members to get the loans, and we work with the members to whom other places would deny credit.”

That’s not to say the credit union has lax underwrit-ing or lending standards. Rather, Pingel says, the credit union staff is willing to put in the time to help rehabilitate members’ credit so that Fort Dodge Family can provide a loan. “If we have to, we work with them to clean up their credit first,” Pingel says. “We really invest in the member.”

The effort fuels profitability in two ways. First and foremost, it keeps loan volume high. Second, it keeps member loans in house and away from risky lend-ers offering loans that could cause members—and ultimately the credit union—additional financial problems.

Beyond that, it strengthens relationships with mem-bers who appreciate some handholding as they restore their credit and the chance to obtain credit when other lenders won’t offer it. When those mem-bers work their way back into better financial shape, the hope is that they’ll feel a sense of loyalty to the credit union. In other words, they’ll stand by the credit union in good times after the credit union stood by them in bad.

Fort Dodge Family CU at a Glance• Assets: $9,979,273

• Members: 2,500






Fort Dodge Family Credit Union Strategic Lending and Fees


Risk-based lendingYet the high loan-to-share ratio is only part of the picture. Another key to profitability at Fort Dodge Family is risk-based lending. Pingel says the credit union moved to risk-based lending about five years ago. By pricing loans based on the risk level of the member, Fort Dodge Family can carry a portfolio with everything from A to E paper. The riskier loans have higher delinquency rates, but they bring in more income. Pingel says the credit union protects itself by monitoring the mix every month to ensure a healthy balance and by working closely with riskier members to help them avoid trouble that could affect their loans.

Pingel says loans at all levels still can become delin-quent or default, usually due to circumstances such as divorce, illness, or job loss. Yet she believes member loyalty protects the credit union because members want to honor their debts and are willing to work with the credit union to find ways to do that.

The move to risk-based lending made the credit union more competitive as it could offer better rates to more stable members, thereby attracting or retaining their business. It also provided a growth opportunity because the credit union could attract new members who might not be able to obtain credit

elsewhere. Overall, risk-based lending grew the credit union’s loan portfolio, grew the membership base, and increased profitability. Pingel says it was by far one of the smartest and most profitable moves the credit union made.

Strategic feesFees play into the profitability picture at Fort Dodge Family. Insufficient funds fees generate a great deal of noninterest income, Pingel says, as they do at many credit unions. Fort Dodge Family will work with members who have multiple charges, but Pingel says some members simply choose to pay the fees.

Otherwise, Fort Dodge Family employs fees primar-ily to cover the cost of products or services, not to make a profit. Cashier’s checks and Visa gift cards carry nominal fees and don’t have any measurable impact on profitability. Many other services carry no fees because Pingel doesn’t want to nickel-and-dime members. “Members come first,” she says. “When you’re charged for each and every service, that’s a big turnoff. We don’t want to be like that. It’s hard to build loyalty. You might have the potential for more profit, but how much negative impact would that have on member relations?”

An example of the fee balancing act is the relation-ship between the ATM and Visa card programs. The ATM cards don’t generate interchange income for the credit union, while the Visa cards can. Pingel says the credit union is phasing out ATM cards and mov-ing members to the Visa cards. The goal is for inter-change income to offset the cost of offering the cards.

The credit union allows only five debit transactions per card per month. After that, there’s a 50-cent charge per debit transaction. When staff notice mem-bers with a high number of debit transaction fees, they’re contacted and made aware of how to avoid the fees without limiting card use.

Pingel reiterates it’s imperative to keep fees low and limited because of their effect on the overall member experience. “Word-of-mouth is key to your success,” she says. And Pingel wants members talking about the credit union’s great service, not ubiquitous fees. “You need to make enough money to run your credit union. You need to make enough to put money in reserves,” she says. “But you have to put members first. That’s who you’re serving and why you exist.”

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AA credit union doesn’t have to offer every service to be full-service. Union Fidelity Federal Credit Union is small—just $13 million in assets, with 3,900 mem-bers and one branch. It doesn’t offer everything, but it provides a mix of products, services, and accessibil-ity that members want and—more importantly—use.

That, says CEO Cindy Hester, is the key to Union Fidelity Federal’s success. “We can’t be everything to everybody,” she says. “You have to look at the needs of your members.”

Union Fidelity Federal serves labor unions and a primarily blue-collar membership in Houston, a city fueled by the energy industry. Many members are doing just fine, paying their bills on time and main-taining excellent credit. Other members are feeling the pinch of higher gas prices and escalating grocery prices. There are well-paying jobs aplenty, but there are still many workers living paycheck to paycheck. Other members have gotten in over their heads with their mortgages. Some just have bad credit.

“We know our membership is diverse both economically and socially, and we want them all to be represented in the prod-ucts we offer,” Hester says. “We try to pay the savers the highest dividend we can, but we want to make sure we don’t forget the others. We want to help everybody.”

So in its effort to meet the needs of all its members, particularly through risk-based lending, Union Fidelity Federal also creates an opportunity for great-er profitability. Yet turning that opportunity into profit requires careful selection and management of products and services, close oversight of the lending portfolio, and constant scrutiny of expenses.

Higher risk, higher reward Union Fidelity’s loan mix reflects the diversity of its membership. Of all the loans on the books, 30% are A+ paper while 40% are D and E paper. “If all we do is help the people with A+ paper, we’ll have low delinquencies,” she says.

But there’s a downside to operating with very little risk. “We may not be very profitable. Plus, that’s not really what credit unions were chartered for. If we don’t step up and help higher-risk members, they’re going to go somewhere else. They’ll go to payday lenders and may end up with a loan they can’t afford and won’t be able to pay back.”While many credit unions shy away from loans to members with credit scores in the 400s, Hester

4Union Fidelity Federal Credit Union Know Your Members

Union Fidelity FCU at a Glance• Assets: $13 million

• Members: 3,900







knows there are ways to work with those members and remain profitable. “If you have D and E paper, you know you’re going to have to price it,” she says. “We use the credit score for pricing. We don’t use it to determine whether to make the loan, and I’m not necessarily going to turn someone down because his score is 500. But I’m going to price it accordingly.”

Hester says she considers many factors when mak-ing loans, including how long the member has been with the credit union, whether he has direct deposit, whether he has had any NSF checks, and the debt ratio. “We certainly don’t want to put them in any payment they can’t afford,” she says.

Even though risk-based lending can be profitable, current margins are still narrow due to low interest rates. So lending to riskier members only adds to the bottom line when loan volume remains high. And keeping loan volume high in a shrinking economy is a challenge.

Stable of productsThat’s why Hester has amassed a stable of products that reflect her members’ needs. Union Fidelity Federal offers loan promotions on used cars to keep members out of loans where they owe more than their cars are worth. There are short-term Internal

Revenue Service payback loans to help members avoid penalties and interest charges on overdue tax bills. If a member loses a job, the credit union offers loan extensions during the lean months. Also, some products have a skip-pay option around the holidays to give members a little extra cushion. “We’re trying to come up with products that make their earnings go further,” she says, “and keep loan volume up.”

Not only are these products popular during difficult economic times, but they also allow Hester to help some less-secure members. She feels it keeps them away from payday loans and unscrupulous used-car dealerships. Moreover, it gives Union Fidelity Federal a chance to meet face-to-face with members and counsel them on improving their credit scores, something Hester says has grown more common and important during the past decade.

Union Fidelity Federal also has loan products designed specifically for credit repair, not for profit-ability. Hester thinks they’re an important part of the credit union’s product mix and mission. One $500 loan has a six-month term. If members make all the payments on time, the credit union will raise the loan to $1,000. The credit union reports the loan to the credit bureau and, in time, it can help improve the member’s credit. Sometimes members are frustrated with the seemingly slow process, but Hester says it’s a prudent approach. “It may have taken some of them three or four years, but they’ve gone from a 400 to a 700 or 800 credit score,” she says.

VigilanceThe flip side of lending to D and E paper is the risk. If those loans go bad, ultimately they’ll lead to losses, which diminish profitability. So risk-based lending “requires a whole lot more work because you’re con-stantly monitoring those and collecting them some-times,” Hester says.

Hester personally contacts members within 20 to 30 days of a delinquent payment, and staff will contact members via cell phones or at home. Since Union Fidelity Federal has an employer-based field of membership, Hester can also track down delin-quent members through their jobs. She also calls on the board of directors to help her locate people and determine what’s going on. As a result, Union Fidelity Federal’s delinquency rate is low, especially when considering its diverse loan mix.

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Prudent spendingEarning money is only part of the profitability plan at Union Fidelity Federal. An equally critical facet is prudent spending. Hester says the credit union care-fully weighs cost versus convenience for all products and services it offers. “We want to offer the products our members would like,” she says, “but if your core membership doesn’t want the products, then you don’t have a lot of members using them and you’re still paying for them.”

Basic services include share draft accounts, direct deposit, credit cards, and debit cards. The credit union also partners with a mortgage company to provide mortgages, although Union Fidelity Federal doesn’t fund them. So far the credit union doesn’t offer online banking or bill pay. Hester has been researching both since 2000, but she doesn’t think she has a critical mass of her membership ready for those products. “We don’t offer something just because the credit union down the street does,” she explains.

Having a single branch saves a lot on overhead. Yet Hester recognized the lack of convenience was a con-cern for members. So in 2006, Union Fidelity Federal joined a shared branching network. “Our members have all of our services available to them nationwide,” Hester says, “but we don’t have the cost of a branch.”

She also shops rates, noting that the Internet has made it easy to find out what other similarly sized credit unions offer. Hester doesn’t react to changes in the market too quickly because she doesn’t want to get locked into low long-term pricing. “I want to be competitive, but I don’t want to act too quickly,” she explains. “If you lower your car loan, you’re stuck with that rate for five or six years.”

Instead she’ll use short-term coupons that lower rates for a portion of the loan’s life, and sometimes she’ll adjust interest rates for members if they stay current on payments and improve their credit scores. Those strategies have appealed to members as much as rate specials have.

Hester regularly reviews investment yields and con-tracts with vendors, and she negotiates better deals whenever she can. She notes many vendors will offer better pricing for longer terms, and Hester explores those options with her more tested and trusted ven-dors—but usually not with new ones.

The Texas Credit Union League is also a valuable resource. The League has strong programs for small credit unions, and Hester has made a lot of con-tacts through her involvement. That networking has afforded the opportunity to ask other credit unions candid questions about their operations, including vendor cost, quality, and satisfaction. “We’re really good about going into each other’s shops,” she says. “I would never start a new product without first talk-ing to another credit union that’s using it.”

Other strategiesUnion Fidelity Federal emphasizes communication with members. Its branch gets a lot of foot traffic, and employees take the opportunity to get to know members and to cross-sell products. If Hester notices a member doesn’t have direct deposit, she’ll ask why. Sometimes the members just don’t know the credit union offers it. Casual questions often create oppor-tunities to educate members, increase product pen-etration, and strengthen relationships.

Fees, including ATM and NSF charges, are also part of the picture. Credit life, credit disability, and gap insurance, among others, are additional sources of noninterest income.

Mostly, though, Hester says her focus is on serving her particular membership. When she does that well, the credit union thrives. “Our focus is not on growing assets or profits,” she says. “When we offer the right products, our members use more of those products and growth is a natural byproduct. Everything else just falls into place.”

MBEST PRACTICESReturn on Assets14

5Michigan State University Federal Credit Union

Intangibles Lead to Earnings

Michigan has the highest unemployment rate of any state. It’s in the top 10 for foreclosures. There simply isn’t a lot of good economic news. Yet Michigan State University Federal Credit Union (MSUFCU), East Lansing, with $1.5 billion in assets, manages to stay highly profitable. It does so by rewarding employees, maintaining a highly successful Visa portfolio, and, most important, competing on service, which yields organic growth.

CFO Tiffany Ford acknowledges much of the state’s trouble stems from job losses in the auto industry and manufacturing, while the credit union draws its membership largely from faculty, staff, and students of Michigan State University. Ford believes the credit union has grown due to many intangibles that indi-rectly affect profitability rather than by providing a discreet, traceable revenue stream.

Invest in staffFord attributes a large part of MSUFCU’s success to

its highly skilled, well-trained, and knowledgeable staff. “We believe if we’re able to attract and retain a talented staff, our membership will be satisfied with the service offered,” Ford explains.

Yet staffing is an expense—the largest expense for most credit unions. It’s a delicate balance to offer the right compensation and benefits package along with training and advancement opportunities. Also, that balance changes with the credit union’s performance and the overall economy, requiring the credit union to re-evaluate its offerings from time to time.

For example, at one point MSUFCU employees could volunteer to work a Saturday shift on top of their regular schedules. They’d receive overtime pay at a rate higher than their usual hourly rate. Ford says management recognized the credit union could save money by scheduling those shifts as part of a regular schedule, rather than as overtime. There was some resistance at first, but eventually attitudes adjusted and the Saturday schedules weren’t an issue.

The credit union is willing to revisit decisions that have a negative impact on morale. In one case, it was as simple as bringing back water coolers. Ford says it’s a small example of a large effort to keep staff satisfied. “If our employees are happy, our members are happy,” she says. “So we provide a great environ-ment, and we treat our employees well.”

Michigan State University FCU at a Glance• Assets: $1,504,952,969

• Members: 141,012






Another program rewards staff for identifying cost-savings strategies. Employees who identify changes that save money get publicly recognized and receive a financial reward: the lesser of 10% of the savings or $2,500.

One employee suggested changing the way credit card information was delivered to the servicer. It saved the credit union $200,000 a year. Another employee identified a procedure that reduced fraud to the tune of $80,000. The suggestion program is a win-win situation because the credit union saves money, which increases profitability directly, and it improves job satisfaction and performance among employees, which increases profitability indirectly.

Interchange incomeA key component of MSUFCU’s profitability is the Visa program, which generates $9.4 million per year in noninterest income. Currently 43% of members carry one of the four fixed-rate cards offered. Ford says the cards with fixed annual rates contrast in a positive way with other cards that offer low introduc-tory rates but feature punishing rate hikes for late payments.

The credit union offers an in-house contact center, open 7 a.m. to 9 p.m. Monday through Friday and 9 a.m. to 3 p.m. on Saturday. There’s also an online chat service with extended hours for additional assistance. Although the contact center isn’t specific to Visa products, Ford says members particularly appreciate the opportunity to work out credit card issues with someone from the credit union.

Despite the Visa program’s profitability, member service is still paramount. So when a member with a Visa Classic card might be eligible for the better interest rate of the Visa Platinum, staff will offer the lower-rate card. It’s trading a small, short-term income loss for a stronger relationship with the member, something the leadership at MSUFCU con-siders a long-term gain. “We’re going to be losing on the interest rate, but our members appreciate that,” Ford says, “and the next time they’re looking for a car loan or a mortgage, they’ll come back to us.”

Growth through volumeUltimately, it boils down to member service at MSUFCU. “We’re not the type of credit union that’s making certain investments or trying to get the best yield or cutting rates just so we have a certain level of profitability,” Ford says.

The credit union offers competitive rates and sets financial targets (including 0.9% to 1.1% for ROA) but competes primarily on service. According to recent surveys, 97% of members were satisfied to very satisfied with the credit union, which when coupled with the credit union’s profitability validates the member-first strategy, Ford says.

“Everybody’s offering financial products. What’s going to set you apart is the service you provide. We have members who are willing to give up a little on an interest rate because they know they’ll be taken care of,” Ford explains. “And if you have the volume because you’re offering great service, then your earn-ings will go up.”

The key at MSUFCU is to never take members for granted. “We always try to woo our members,” Ford explains, “so that when they’re looking for the next product, they’re looking to us for it.”


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RReliant Federal Credit Union doesn’t try to be a high-earning credit union. Its profits come by way of strong member service. In fact, Reliant Federal CEO Steve Higginson says the most important reason for the $68 million asset credit union in Casper, Wyo., to be profitable is so he can pass along the earnings to its 9,600 members by way of lower fees, lower interest rates on loans, higher interest rates on deposits, and higher dividends.

Yet profitable member satisfaction is complicated. It takes more than just a cordial attitude and sunny atmosphere in the branch. It involves calculated investments in staff, infrastructure, and services, as well as long-term strategic planning.

Indeed, member satisfaction is a constant at Reliant Federal, and the credit union is willing to be an early-adopter of products and services that will improve members’ experiences. However, specific earnings targets vary from year to year, moving up or down as goals and objectives change. So profitability isn’t a static measure from one budget cycle to the next.

At Reliant Federal, profitabil-ity is measured over the long term with deliberate peaks and valleys as the credit union executes its plans to update branches, add services, or grow deposits. That approach steadies the credit union when temptation arises to match a competitor’s rate special or to expand the mortgage portion of the loan portfolio during a hot but short-term real estate market.

Investing in employeesThe current energy boom is great news for Wyoming. The state enjoys a remarkably low unemployment rate, and oil, gas, coal, and other energy companies are hiring with starting salaries near $20 per hour. Anyone here who wants a well-paying job, it seems, can find one.

While that’s good for members, it’s not all good news for Reliant Federal because it makes it more challeng-ing for the credit union to attract and retain employ-ees. “Without completing high school, a kid can walk onto the oil fields or into the coal mines for $18-24 per hour,” Higginson explains. “That’s a wage we can’t compete with for an entry-level teller position.”

That’s part of the reason Reliant did away with its teller position. Now new hires start out as member service representatives—a better paying job.

Yet attracting skilled employees is only part of the

6Reliant Federal Credit Union

Planning for Profit

Reliant FCU at a Glance• Assets: $67,867,533

• Members: 9,596







challenge. Higginson’s experience suggests compen-sation attracts people to positions, but intangibles like work atmosphere and job satisfaction are what keep them. That’s why the credit union invests in employees with more than just their starting salaries.

Reliant Federal offers employees several low- or no-interest loan products as part of the regular compen-sation package. Options include a no-interest revolv-ing line of credit employees can use to purchase professional clothing for work and a 2% discount on fixed-rate consumer loans. Employees also can take out an interest-free computer loan.

“We’re pretty progressive,” Higginson says. “We’ve put some money aside that we’re not going to earn any interest on to fund these initiatives. But we want our employees to have adequate technology at home, so when there’s some new technology at work, they’re comfortable with learning it.”

Three years ago, Reliant Federal hired a human resources specialist to focus on improving and increasing training opportunities. And as the econ-omy has created more difficult times for members, Reliant Federal hasn’t only invested in current staff members, they have been aggressive in adding staff. The credit union has added an experienced collector

in order to salvage loans before they must be charged off. Higginson says the savings have more than cov-ered the cost of the new employee.

All of the investments in human resources reflect Higginson’s belief that a strong credit union comes by way of a skilled staff. “With the emphasis we place on serving our members, it’s very important for us to have employees that have been with us long enough to have gained significant product knowledge and procedural knowledge,” Higginson says. “That allows us to serve members without mistakes.”

Mistakes, he says, cut into earnings directly and indi-rectly by dissatisfying and thereby distancing mem-bers.

Investing in infrastructureSometimes it makes sense to set lower profitabil-ity targets because of long-term strategic plans for growth, Higginson says. For example, the credit union has just started construction on a $3.5 mil-lion building, and it recently relocated its Glenrock branch and renovated its Douglas branch. The credit union added ATMs even though the costs of operat-ing those aren’t covered by fees alone.

Yet Higginson says the credit union’s high standards for member service demanded spending money to update branches and add convenience.

“Did we stop and ask ourselves if can we afford this?” Higginson asks. “No. Actually, the first question we asked ourselves was ‘Can we afford not to do those things that would improve service to our members?’ There are services our members need, and we’re here to serve the needs our members have.”

The credit union also tries to stay on the cutting edge of technology. “When it comes to providing an enhanced or faster service to our members, we gener-ally react fairly quickly,” Higginson says.

Although not all of the products have gained traction out of the gate (Higginson identifies mobile banking as one adopted too early), the board allows the credit union to try and sometimes to fail. “They believe fail-ure isn’t fatal,” Higginson says. “The board allows us to try some things that may not work out. And if it doesn’t work out, we’ll turn it off and try something different.”

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Reliant Federal’s track record suggests the course of action to prioritize member needs over strict profit-ability is the right one. The credit union has steadily grown assets, loans, reserves, and membership with its member-first approach.

Growth through serviceLoan growth has to match asset growth if Reliant Federal is going to sustain its earnings. Appropriate pricing fuels only part of that growth. Service, Higginson says, fuels the rest.

Used-vehicle loans are the bread and butter of the credit union, which doesn’t participate in indirect lending. Higginson says Reliant Federal’s fast approv-al process and knowledgeable staff inspire member loyalty and word-of-mouth referrals for used-vehicle loans. All loan officers are also underwriters, so one person handles each loan from start to finish, and members receive decisions within minutes of apply-ing.

The credit union runs rate specials and marketing campaigns from time to time when it wants to pro-mote specific products. Last fall when the predomi-nant bank in Douglas (where the credit union has a branch) began charging $100 to apply for a con-sumer loan, Reliant Federal went head-to-head with the bank. Reliant Federal advertised that it doesn’t charge application fees for consumer loans, and its monthly consumer loan volume tripled. Staying the courseEssential to Reliant Federal’s success is adhering to plans for all aspects of credit union business. Staying focused on long-term goals, Higginson says, makes it easier to resist short-term temptations.

For example, several years ago when the real estate market was hot, Reliant Federal’s board resisted the urge to expand its mortgage program, which can comprise no more than 17% of the total loan portfo-

lio. Mortgage growth simply wasn’t part of the credit union’s long-term growth plan.

Now the credit union doesn’t have a single mortgage delinquency, and it never has. “When the boom hit the mortgage industry, we sat on the sidelines and watched,” Higginson says. “Now that the bust has hit, fortunately for us, we’re still sitting on the sidelines and watching.”

Reliant Federal also doesn’t chase rates. The credit union operates in a fairly isolated area, and most competition tends to be local, Higginson says. It’s easy to find out how other financial institutions are pricing their products, and Higginson stays abreast of competitors and rate changes to make sure Reliant Federal is in the thick of the mix. The credit union won’t, however, try to best all the competition on all loan or deposit rates. “There may be a financial institution out there in need of cash, and they’ll put a certificate out there designed to draw deposits,” Higginson says. “We don’t do that.”

Unless Reliant wants to be the area leader on that product or it wants to grow deposits, the credit union likely won’t react to a competitor’s rate special. The key to profitability, Higginson says, is to manage rates independently. So that means Reliant Federal also doesn’t respond to federal rate cuts with knee-jerk rate cuts of its own.

“You have to manage your rates,” Higginson says, which involves considering the credit union’s phi-losophy, strategic plan, and core values when setting rates. “For us it’s more important that we serve all our members than it is to have the lowest loan rates or the highest dividend rates. If we set our loan rates to be the lowest in our market and our dividend rates to be the highest in the market, we may not be able to build that new branch or add that ATM that would better serve our members.”


7Cedar Point Federal Credit Union Long-Term Profitability

PPlain vanilla. It’s how a lot of credit unions describe their operations, and it’s how CEO Barbara Horn thinks of Cedar Point Federal Credit Union. The $250 million asset credit union in Lexington Park, Md., is steeped in the credit union philosophy of putting the member first and focusing on service. Products and services are introduced to help mem-bers, not simply to turn profits.

Yet Cedar Point Federal is profitable. Even in a deposit-growth period when the credit union is run-ning rate specials to attract funds, the credit union has a return on assets (ROA) above 1%. In the past, it has been even better—as high as 2.05% in 2006 when the credit union’s loan-to-share ratio increased from 65.1% to 71.5%.

Within its member-first paradigm, Cedar Point Federal’s success comes from simple, straightforward strategies such as long-term strategic planning, con-stant review of expenses, and strategic but fair use

of fees. But the simplicity of the approach is misleading. Cedar Point Federal is profit-able because of skilled and disciplined leadership and a faithfulness to its business plan that matches its loyalty to members.

Strategic planning In 1995, the credit union had $65.2 million in assets and 16,822 members, not the $230.8 million in assets and 28,888 members it has today. And 13 years ago, when Horn took the helm, net income was $556,000 with an ROA of 0.85% and a capital ratio of 6.46%. Cedar Point Federal ended 2007 with $4,449,000 in net income and a capital ratio of 13.57%.

Horn credits the sustained growth and improved profitability to the credit union’s dedication to strate-gic planning and its discipline in executing its plans. So when Horn and the board first put their heads together, they looked to the future and envisioned what they wanted Cedar Point Federal to be. Then they started mapping out the path to get there.

Through the years, they planned to add branches, to expand products and services, to raise various earn-ings and volume targets, and to expand its field of membership by adding numerous select employee groups (SEGs) to the 44 that Cedar Point Federal had in 1995. Now credit union management and leader-ship even project what factors will contribute to earn-

Cedar Point FCU at a Glance• Assets: $250.8 million

• Members: 28,888







ings pressure, and they plan strategies—including alternate growth targets and timelines—should those pressures materialize and mount. It’s a slow and steady approach, but that’s what’s winning the race for Cedar Point Federal.

“We’ve worked toward everything we’ve done here,” Horn says. “We don’t just jump and add something. We’re very sure before we do it.” Now the credit union is well-positioned for additional growth even during trying economic times when delinquencies are likely to rise and loan demand will likely recede.

CFO Charles Roach says sound lending practices and a strong portfolio will carry the credit union through hard times. Both Roach and Horn are comfortable with the nearly $32 million the credit union has in reserves. Also, the diversified membership base now has 545 SEGs and is stable enough that even if the largest SEG, Patuxent River Naval Air Base, should close up shop it wouldn’t mean the imminent demise of Cedar Point Federal.

Controlling expensesHorn says the credit union consistently monitors expenses and looks for ways to reduce them without materially affecting member or employee satisfac-tion. Again, the credit union moves in a thoughtful,

measured fashion, executing due diligence to ensure changes in products or vendors are appropriate.The credit union changed its core operating system in 2001, and Roach says it took about four years of research and review to reach a decision.

Last year Cedar Point Federal saved $50,000 by switching to a new provider for its benefits pack-age. The previous provider was proposing a 10% to 12% cost increase, so Roach decided to shop around. What he found was a new provider that could offer the same coverage for less. The credit union even picked up a larger percentage (60% instead of 50%) of employees’ monthly premiums. And employees are saving, too. Those on the family plan pay about $200 less in premiums than they did under the previ-ous plan.

Roach says credit union leadership talks about the potential savings and any potential pitfalls and costs of proposed changes before taking action. Sometimes it’s prudent to shop around even if a credit union is satisfied with a vendor’s pricing and products. When contracts come up for renewal, it’s important to investigate other options—just in case there’s some-thing better out there. “We’re not locked into any one vendor,” Roach says. “You just have to have an open mind.”

Fair feesLow interest rates means margins are thin. Investment portfolio yields are shrinking. Many credit unions are turning to noninterest income to increase earnings, and fees are a popular approach. But they aren’t without controversy.

While many credit unions charge fees to cover the cost of products or services, such as nominal fees for money orders or cashier’s checks, just as many credit union executives are loath to add fees purely to boost profitability. Horn is one of those. “I’m not a CEO who likes to charge our members anything we don’t need to charge,” she says.

Increasing profitability as the driver of fees can often feel at odds with the member-first credit union phi-losophy. Yet some fees can improve profitability without exploiting members. Cedar Point Federal reached that conclusion with overdraft protection that it started offering four years ago. In the first year, it generated $404,000, or 15.6% of the credit

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union’s noninterest income. Last year, the fee income grew to more than $1.2 million, or 27.8% of nonin-terest income. “I come from a banking background,” Roach says, “and I was shocked at how successful it was.”

The fee is $25 every time a member overdraws an account. The item, however, is paid so the member avoids insufficient funds charges from the credit union and the merchant. Instead of paying two charges, the member pays one fee and saves the hassle and embarrassment of dealing with a bounced check. Also, the fee paid goes to the credit union, not a merchant or different financial institution, so it ultimately benefits the credit union membership as a whole.

Horn says the credit union debated the program for a long time before agreeing to implement it. She wor-

ried about giving members a false sense of security and a lax attitude toward their accounts. She also didn’t want the credit union to profit from members’ missteps.

The credit union offers the overdraft protection only to members with no negative accounts or delinquent loans, says Roach. Cedar Point Federal also educates members on how overdraft works and monitors how they use it. Members whose behavior could lead to abusing the service receive counseling.

Horn says it takes diligence in all areas to be suc-cessful, and there isn’t one magic bullet that makes a credit union grow and thrive. For her, it’s all about balance and service. “Everything we do here just flows together,” she says. “It all comes together and just works for us.”


8Whatcom Educational Credit Union Profitability Through Presence

LLend all the money. Deliver the dream. Those are the mantras of Whatcom Educational Credit Union (WECU), a $550 million asset credit union in Bellingham, Wash. And what it boils down to is this: The more money WECU loans, the more profitable it is. The more profitable it is, the more it can offer its members. So the best way for WECU to position itself to deliver dreams to all its members is to lend all the money.

Yet lending all the money isn’t quite as simple as it sounds. The credit union has to have the exposure, the products, and the pricing for current and future members to turn to it—and not its competitors—for loans.

Building that exposure, developing the products, and setting the rates is as much an art as it is a science, says CFO Jennifer Kutcher. But WECU employs methods that produce the results the credit union and its members want.

Stiff competitionWhatcom County, where WECU operates all of its branches, has more financial institutions than any other county in the state, Kutcher notes. In the tech-savvy Pacific Northwest, WECU membership is also well versed in Internet banking and virtual financial institu-tions.

WECU has worked hard to develop a strong com-munity presence. With a dozen branches, 21 no-surcharge ATMs, and two financial education centers open to the public, WECU wants the community to see it as the best overall value—the most accessible, the most helpful, the most trusted, and the fairest partner—for personal and business finances. “We’ve focused on our immediate county and our immediate membership base,” Kutcher says. “We have approxi-mately 250 employees across our branch network. We have a presence, a big presence. Obviously that costs money. But our members want that presence. They want the convenience.”

The credit union also participates in home shows to spur interest in its real estate lending, and it entered into commercial lending nearly five years ago to achieve greater market penetration and growth. “There was a need in the community,” Kutcher says of getting into commercial lending, “and it was an area in which we believed we could compete, build

Whatcom Educational CU at a Glance• Assets: $550 million

• Members: 53,915







relationships with our members, and extend new membership.”

That speaks to the importance of identifying strengths and member needs, Kutcher says. She explains it’s critical to determine what a credit union does well and to focus on those products and ser-vices. That will help credit unions narrow the field of competition overall and in specific areas.

For example, Kutcher says WECU also has had suc-cess in developing a large base of core deposits, which helps keep down the cost of funds. Before switching to a community charter, WECU served some of the largest employers in the county. By offering direct deposit, online bill pay, no-fee checking, and no-fee debit and credit cards, Kutcher feels confident WECU has become the primary financial institution for a majority of members, 65% of whom have a checking account with the credit union.

“You can’t try to be all things to all people and com-pete against everyone,” Kutcher notes. “You have to decide whom you’re going to compete with,” she says. “If you know you can’t compete with someone or you’ve chosen not to compete with someone, it helps you focus on your own strategies and what you can do.”

When it comes to other brick-and-mortar finan-cial institutions, WECU’s strategy involves a mix of competitive pricing, convenience, trust, and service. Kutcher says the credit union still picks and chooses who its competition will be, and sometimes those choices coincide with changes in the marketplace.

Internet banks are especially vexing since they don’t have the overhead WECU has, Kutcher argues. As a result, the Web-based businesses can offer rates WECU can’t touch, and the tech-savvy WECU mem-bers are aware of the online bargain pricing. “We would love to offer the highest rate on deposits and the lowest rate on loans, but we have to maintain a spread so we’re not compromising the future earn-ings of the credit union,” Kutcher explains.

So instead of competing with the virtual banks solely on pricing, WECU focuses on service, touting the fact members can walk into a branch and talk to a person when they have questions about their mortgages. Or they can call the branch, which operates its own call center, if strange charges show up on their state-ments.

Rates are still competitive, but it isn’t imperative for WECU to be the market leader on multiple products. “Pricing is an art,” Kutcher says. “You do look at your competition, but you also have to look at your strengths, your mix, and your balance sheet.”

Noninterest incomeOne thing that affords WECU some flexibility in pricing is the steady stream of noninterest income generated by its Visa portfolio, courtesy pay program, and real estate fees.

WECU offers four different credit cards, including a business Visa. Interest rates are fixed, and there’s a 1% cash-back reward program. A student Visa card with a $250 limit introduces 16- and 17-year-olds to credit, with the approval of their parents or guard-ians. There are also Visa gift cards.

One of the most attractive features for members though, is the credit union’s own card services department, which keeps member service local. In addition, none of the interest rates have risen in the past 10 years. All told, the credit union earned more than $2.8 million in interest income and more than $1.7 million in fee income on its Visa credit card

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portfolio last year. WECU also gave back more than $930,000 to members in the form of a rebate.

In the same year, WECU generated nearly $4.2 mil-lion from NSF fees, including $3.1 million from an overdraft protection program called Privilege Pay. Members who qualify are given an “extra” limit amount on their accounts. These members are then allowed to overdraw their checking account up to the given limit. Each use of Privilege Pay incurs an overdraft fee. WECU’s overdraft fee is $13, which is extremely low for the market. Also, since WECU ser-vices its mortgages in-house, it earns fee income from real estate loans. The credit union’s high mortgage volume (the credit union funded 316 first mortgages amounting to $61 million in 2007), yields a signifi-cant income stream for the credit union.

Lend all the moneyAt WECU, a strong community presence leads to profitability, and sustained profitability allows the credit union to continue to build its community pres-ence. In other words, the credit union has found a way for its growth to fuel its profitability and for its profitability to support its growth.

Again, Kutcher says striking that balance is an art as much as anything. “We have to make sure we’re pro-viding the products and services our members need, and we need to make sure we have the branches and staff in place to do that,” Kutcher says. “And if we can find smart ways to price appropriately and offer the right loan products, we’ll continue to be strong.”

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