LAS VEGAS–It was agreed that “profit is not a bad word” during a panel discussion here, but the agreement ended there and the debate moved to which is more important: investing a credit union’s income in new technologies or paying it out as dividends?
For the record, those involved in the debate largely agreed the answer actually lies closer to the middle, and is often determined by asset size.
Debating that issue during the Mitchell Stankovic "Underground Collision: CUSO Mayhem" meeting here were Tyler Valentine, president/CEO of StagePoint FCU, and Mary Beth Spuck, president/CEO of Resource One CU, who took the side of paying dividends; and Donna McNeely, president of Kinecta Financial Management, and Bill Butler, CEO, of Kachinga, who argued in favor of making investments.
Here's a look at what was discussed:
Valentine: We are an $80 million credit union in Laramie, Wyo. As a small credit union we can’t tie up all of our assets or a significant portion of assets in something that isn’t going to have a return to the credit union. If there is no dividend, I can’t tie up the balance sheet with that CUSO investment. That trickle-down has to come back to the members. If we can’t pay a dividend to our members, there is a spiral affect—are they going to keep their deposits with us?
We have a large concentration of auto, but also do a lot of non-prime lending, so we are really working to live the mission of serving the underserved. It does not make sense for us to put dollars into higher yielding investments vs. investments in the community. We are thinking about today and the members we have today and the impact we can make in the community today.
McNelly: I think we need to remember not for profit is for the IRS. Sometimes we forget that because our members don’t think of us as not for profit. They want us to be responsible with their money, so we do need to ensure we are making a return. But there are things that come along with those investments.
I run the wealth management team. It takes about three years (for a program) to become profitable, or three years for a new advisor to become profitable. However, our members who have a wealth management relationship with us also have twice as many active products with the credit union vs. the regular direct members.
Spuck: As CEO of a LICU and a CDFI, I look to my CUSO investments to generate income. When I look at our average loan and deposit balances, because we are a LICU we are significantly lower than our peers. So, we have to find other income to reduce the fees members are paying. CUSO dividends are important. If we don’t pay dividends to our members, they are not going to stick around.
As leaders of a credit union we have to figure out how to pay dividends but also make investments to build the CUSO and the organization.
Butler: Our company helps provide technology to educate kids and families and be a resource for the community to teach kids about money. My approach is different; we are a technology company, but setting the investment in technology aside for a moment, it’s interesting what it would take to reinvest in a business. While I see the importance of pay-now dividends, from a technology standpoint it’s important to reinvest in the business.
There are three important aspects of investments: the competition, speed of innovation, and the member experience. If you are not sustaining that for your members long term, there is not going to be the profit going back to the business to grow the business. Members are getting older, they are 50 plus. The technology piece is important in getting those younger members.
Valentine: I think this argument is different depending on where you sit in the credit union ecosystem. Large CUs have that ability to make an investment without the immediate return. CDFI credit unions and those without the resources need to have the immediate return.
Audience Question: Do we need a shift in mindset to look to CUSOs as an investment opportunity?
Spuck: I think there are different reasons for investing in CUSOs. Do you need to reduce expenses through collaboration? Sometimes, it’s just a flat-out investment vehicle to return non-interest income. We have to figure that out. But if we’re looking to say CUSOs are the saviors for small credit unions, they need to have some sort of return.
Butler: Competition is hot. Even if you are a small credit union it’s important to invest something back in the credit union. If you don’t invest in technology you could become obsolete.
Spuck: I don’t think investing or paying dividends is an either/or.
Valentine: We have to have the capital to weather these once-in-a-life time financial crises that seem to happen every two to three years now. There is a lot of balance and management that is needed.
McNelly: It’s different by demographic. Younger members want the technology, older members want the dividends.
We were in a long-time low-rate environment, and now we are in a rising-rate environment. What has that meant?
Valentine: This is the first time I’ve seen (rising rates) in my lifetime. We’ve always tried to take a middle road on investments and dividends—'This is what we are we doing with your dollars in our market—have your dollars with us because its benefitting the community as a whole.’ We have really tried to tell that story.
Obviously, rising rates have had a dramatic effect on cost of funds. We are 99% loaned out. It’s walking a fine line of what we can do with the dollars we have, and it’s becoming increasingly difficult.