By Ron Schmidt
I was recently asked to present a regulatory update for a board and decided to give them a 45-year perspective of the allowance for loan losses, beginning with FASB through the outbreak of CECL.
You know CECL is where you track every loan you’ve booked like a helicopter parent tracking their kids. And to make sure they weren’t throwing things at me, half-way through the presentation I veered from regulations to the business of their credit union.
In addition, I related that it seems as if we in the credit union industry seem to run our businesses in a regulatory reaction mode. So I asked: what if we look at our credit union outside the scope of regulations, what would we see?
I compared their financials 10 years prior and isolated some key elements. Here’s what I found:
- Investments had shrunk 50%
- Loans grew 175%
- Fixed assets were up 135%
- Shares were up 25%
Regulations aside, if you were evaluating this as a business what would your observations be? First keep in mind that during this period credit unions took a financial drubbing when margins dipped to almost nothing. And during this time the stories you read were about the bigger players managing their balance sheet, meaning they were trying to survive. We all went through the temptation of cutting out every cost in the book regardless of service and those service folks--you know, your employees.
What is success?
My question to the board was, how would you judge your credit union’s success? When you ask the question this way, regulations are not even on the radar screen. And my response to them was, you judge success in this order: members, employees and balance sheet; most likely not the fashion Wall Street would develop.
We went back to interpret our results. First, how did we treat our members? Lending increased considerably during this time plus we improved the infrastructure of both our branches and the electronic delivery network. And while our total interest income stayed constant during the market decline, had loans not grown during this time relative to investments, the credit union would have had to merge.
And our employees? If it weren’t for our employees booking the loans, they’d be looking for work elsewhere. Instead, their compensation and benefits rose 60% during that time. And with the increase in lending, delinquency was negligible; a pretty amazing accomplishment given the market fallout.
A Different View
Lastly, the balance sheet: equity grew 75% from 11% equity to assets to an incredible 15%, thanks to the members and employees.
I understand that regulations will never go away and they are what keep us healthy, but I think looking at your credit union outside the guise of your regulations will enlighten you about what your members and employees contribute.
Ron Schmidt is with CBS Certified Public Accountants, LLC, Solon, Ohio. He can be reached at rschmidt@cbscpasllc.com.