“How can credit unions better serve their members rather than them serving us?”
That was the question posed Tuesday by Chris Lawrence, chief financial officer for American First CU in Brea, Calif., during the 2018 CUNA CFO Council conference in Austin, Texas. The self-described “recovering ex-banker” said he was making “great” money in the for-profit sector before making the switch to credit unions four years ago.
“I love the collaboration of credit unions and that we are able to give back,” he said.
Despite his admiration for CUs, Lawrence does have some quibbles with some of the ways the industry operates. He noted the average credit union asset size has been growing 10 percent to 11 percent per year, in large part because small credit unions are being merged out.
“We are losing some of our grass-roots lobbying power. This is happening because of ROA. The bigger the credit union, the easier it is to make money, the easier it is to attract new members. There is more efficiency in size.”
According to Lawrence, two parts of the industry need to be addressed: the accountability structure for CUs and developing appropriate metrics. In looking at banks versus credit unions, he said, bank shareholders keep the board of directors honest, who keep management honest, who keep customers happy. CUs say members keep the board of directors honest – but “that doesn’t really happen,” he asserted.
“Management tells the board what they need to pay attention to. Management really serves the regulator,” he declared.
End of the tax exemption?
What are appropriate metrics? Lawrence said the National Credit Union Administration focuses primarily on ROA and net worth. However, the simplest way to improve ROA is to “sit on” more capital, which in his eyes raises a conflict because members own the equity.
“What sort of return are we giving on equity?” he asked, saying a focus on ROE means credit unions would give back more to members. “Just focusing on ROA and net worth carries an opportunity cost.”
After taking over as CFO at the $730 million American First, Lawrence said he lobbied to restructure the balance sheet while offering hybrid adjustable-rate mortgages and special five-year CDs.
“Taking equity and putting it into loans or CDs increases income,” he said. “We are taking less risk than we did in 1995. If we continue down this line, I am fearful what will happen to our tax exemptions. In the first paragraph of his letter to NCUA Chairman [Mark] McWatters earlier this year, [Sen.] Orrin Hatch mentioned the original purpose of credit unions: serving people unable to obtain credit from a bank.
“I think losing our tax exemption is inevitable if we start looking more and more like banks,” he continued. “First, we need to adapt to today’s competitive environment, but focus on measures that benefit members. Put excess net worth to work and be mindful of opportunity cost. Invest in a balance sheet that does not bet on interest rates going one way or another. More net worth is not better.”