What are BECU’s goals and strategies from a balance sheet perspective?
KE: Lending, lending, and lending. Our loan-to-share ratio has been hard to move. The original plan for 2014 was to be around 65% loan-to-share. We ended the year higher because of changes in strategy we knew we could accommodate from an interest rate risk perspective. For example, we started holding some 30-year fixed-rate mortgages on our books, which was something we had not done in the past.
We kept investments short through 2014, waiting for rates to pop up. If we do see rate spikes this year, we'll take advantage of that. We don’t look at our investments as an income-producing component so much as a rudder that helps steer our balance sheet.
Another big goal is to build capital. We don’t know what the regulators' expectations are now that we're subject to capital planning and stress testing requirements. If you look at our plan, we're targeting to end 2015 with a capital ratio of 10.6%.
CU QUICK FACTS
HQ: Seattle, WA
Data as of 09.30.14
12-MO SHARE GROWTH: 8.0%
12-MO LOAN GROWTH: 12.9%
How would you classify BECU’s appetite for growth?
KE: We have an appetite for growth but not growth for growth's sake. We've been growing at about 5% of assets — about $1 billion a year. It's been an interesting world growing beyond $10 billion.
If I were to look at our biggest areas for growth, engagement — further deepening relationships with the membership — is first.
Then there's market penetration. We have opportunity for further penetration, especially in some of our calmer micro-markets. But we still have to weigh the value we can present to an individual community against the costs to the broader membership.
The third bucket is mergers and the last would be growing our affinity relationships. For example, this year we’ll be launching a national co-branded credit card with the Boeing Company.
3 ERM Lessons From BECU
BECU’s senior managers learned a lot about enterprise risk management (ERM) while managing their credit union’s growth. Here are a few.
CFO Kathy Elser says the discussions around building BECU’s ERM plan “were some of the best we ever had,” citing the wider perspectives that came from going beyond just the mathematical calculations of risk and reward.
“Risk is inseparable from strategy development,” Elser says. “You need to look at your risks and make sure you're creating value for your members and making decisions that are consistent with your core mission.”
"We’re really conservative and protect our brand pretty much at all costs,” Elser says. But, she says there might be times where you have more room in your interest rate measurements or you’re going to go deeper on your credit. That’s the opportunity when you get to make this decision: “Our loan portfolio has been performing well, so do we get more aggressive on that?”
How have BECU’s ERM strategies evolved over time?
KE: We’ve developed risk appetite statements, which are definitions that management creates and gets board approval on. They cover everything from how we define risk to how much risk we can comfortably manage. Across the organization, we all have a clear picture of our thresholds.
The capital planning and stress testing is forcing us to step back and take a comprehensive view of all the pieces of our business, how they all fit together, and how that ultimately impacts capital. If you don’t understand those things, how can you make the best decision on behalf of your members?
The big unknown for us right now is the examiner appetite for risk. You always want to make sure you can quantify your capital, what you think is adequate, and then hold true to that.
We’ve developed risk appetite statements, which are definitions that management creates and gets board approval on.
What advice would you give to other credit unions who might be subject to additional regulatory requirements in the future?
KE: Start documenting all of your procedures and policies, and make sure you have a board that can mature with you.
A good board isn't a board that's just going to say, "Yes management, we believe everything you say." You need a board that's going to trust, but also push, you.
Small credit unions are not going to be subject to an external stress test, but I think there will ultimately be an expectation for organizations to determine how they define capital adequacy. From there, you’ve got to work that back into your risk identification framework and how that feeds into your strategic vision.
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