AUSTIN, Texas–Every credit union, but especially its CFO, must make a decision around who it is going to serve: it’s members or the regulators, according to one person.
Too often it’s the regulators, said Chris Lawrence, CFO With American First Credit Union in California. That can be seen in credit unions holding far more reserves than necessary in order to please the examiner, even though it comes at a cost to members, he said.
To illustrate his point during his remarks to the CUNA CFO Council meeting here, Lawrence pointed to the number of mergers that have taken place in credit unions. In large part it’s due to the efficiencies that come with scale, he said. But another reason has to do with poor financials—a deficiency that often comes about from not serving members. And that often is the result of poor balance sheet management, he argued.
“Who keeps us honest?” asked Lawrence, suggesting the question is often answered by looking to the wrong metrics, particularly reserves and ROA.
“Credit unions really have two masters: members and our regulators,” he said. “Who is looking out for members? We are sitting on their equity. Are we measuring the return we are giving on equity? Our members often don’t keep our board of directors accountable. And the board is likely looking out for the right things, but many aren’t trained in finance. They count on management to tell them what the right metrics are to keep management accountable.”
Getting Uncomfortable
Driving greater value back to members can make many people uncomfortable, Lawrence acknowledged. According to Lawrence, those same people will say, “If it ain’t broke, don’t fix it.”
Lawrence said he has never cared for that saying, pointing to companies that adopted the same philosophy, such as the defunct Blockbuster, Toys R Us, Circuit City, BlackBerry, Sports Authority, and more.
Lawrence noted one-third of all credit unions are sitting on net worth of 14% or more.
“NCUA is focused on ROA and net worth,” he said. “If you are going to measure yourself with ROA, there is a flaw in this. How do you improve ROA? Keep more capital. A 28% net worth means 1.24 ROA. If this is all you are looking at, you are killing it. But there is something you are missing: opportunity cost. What are you leaving on the table?”
“Better balance sheet management can drastically allow for more return to members,” he said, before running his audience through a series of options to boost returns.
Tax Exemption in ‘Cross-Hairs?’
Holding more net worth made sense when delinquencies were rising, Lawrence continued, but delinquencies are now at record lows.
“We are taking risk off the table with delinquencies going down,” he said. “Arguably, this could put our tax exemption in the cross hairs. We aren’t taking risk, but we are padding our executives’ job security.”
Lawrence is an advocate of using borrowings to remix the balance sheet and boost returns.
“How do we best serve our members? ROA is important, but it’s not the end-all, be-all. It’s what the regulators care about,” said Lawrence, a former banker. “Banking lacks purpose. Our industry is about helping our members; it has purpose behind it. We have to adapt to today’s competitive environment. Focus on measures that benefit members. Put excess net worth to work, and be mindful of opportunity cost.”
Lawrence emphasized that balance sheets should not bet on interest rates one way or the other.