A CFO’s Perspective

One difference between community banks and credit unions is a banker’s emphasis on ROE and a credit union’s emphasis on ROA.

 
 

U.S. New Mexico Federal Credit Union is the oldest credit union in New Mexico. It was chartered to serve federal employees but now counts more than 400 select employee groups in its field of membership. At midyear, it assets topped $750 million and its membership nearly reached 70,000. CFO Michael Ragsdale worked as a credit union teller while in college and was the chief financial officer of a $700 million community bank for 10 years before joining the executive team of U.S. New Mexico FCU three years ago. Here, Ragsdale reflects on today’s credit union environment through a banking lens.

When I shifted from the job of a CFO at a community bank to that of a CFO at a credit union, I had to shift my mindset. At a bank, the work is to generate a return to stockholders. At a credit union, the work is to generate a total return of value to members. Accordingly, discussion of products and services can be different. Consider fees. I’ve found credit unions will have a more thorough discussion of the nature of fees. If a certain fee is punitive, it is not put into use. A bank will not necessarily avoid punitive fees.

CU QUICK FACTS

  • U.S. New Mexico FCU
  • HQ: Albuquerque, NM
  • Assets: $761.6M
  • Members: 69,972
  • 12-MO Share Growth: 4.65%
  • 12-MO Loan Growth: 4.66%
  • ROA: 0.68%

As noted, a bank is in business to generate a return for stockholders. Accordingly, as the CFO of a bank, I gave a lot of attention to return on equity. Making the switch to credit unions, I shifted more attention to return on assets. On account of my own career history, I probably have paid more attention to ROE than many credit union CFOs and I think this has helped me. In any event, banks and credit unions look at capital differently. One of the most precious assets of a financial institution is its capital, which is necessary for safety and soundness, for growth, for expansion, for new service offerings, and so on. Understanding the impact on capital is essential to long-term sustainability. Historically, I think bankers have done a better job of focusing on opportunistic ways to generate capital, but credit unions are doing better in this regard since the financial crisis. Further, the impact of the corporate stabilization has caused credit unions to address capital management.

Bankers have done a better job of focusing on opportunistic ways to generate capital, but credit unions are doing better in this regard since the financial crisis. 

Governance And Boards

The notion of capital reverberates in governance. Bank boards often comprise sophisticated businessmen who — especially at community banks — often have a financial stake in or a strong tie to the bank on account of being a community champion. They are keenly aware of making the capital in the bank work as hard as it can for the shareholders.

On the other hand, credit union board members represent the membership, a fact that can cause diverse representation. These board members are in a conflicted position: They want to maximize institutional earnings but they also want to generate value to the membership. A balancing act must consistently occur on a credit union board. In some respects, I would imagine being a board member at a credit union is a tougher job than being on a bank board.

As a result of the above, credit unions have tended to run their businesses more conservatively than bankers. Bankers feel pressure from stockholders to maximize their return of capital and therefore look for and use all tools available, financial and otherwise, to maximize such return. These tools might include investment vehicles, for example those that help boost earnings or deal with interest rate risk. Historically, bankers have explored, educated themselves, and implemented sophisticated tools. Credit unions have been less bold to use all the financial tools and instruments available to them.

Community

Community involvement makes an interesting point of comparison between banks and credit unions. Historically, banks — notably community banks — have been heavily involved in their communities. This owes to the fact that banks lend to local businesses. Their business plan is to be involved with and have a prominent visibility in their communities. Credit unions on the other hand have traditionally concentrated on a select membership versus the overall community.

But things have changed. Credit unions are now seeking members from the communities more than ever, and they are doing more commercial lending. Accordingly, they are playing catch-up to the kind of community involvement long practiced by community banks. Credit unions still have challenges educating their communities about their ability to join and use the services credit unions have to offer.

Sales And Service

Banks have a more ingrained sales culture; credit unions have a more ingrained service culture. Both seem to be learning from the other. Certainly many credit unions are trying to develop more of a sales culture, similar to community banks, though likely not to the more extreme sales goals seen at the bigger banks.

Technology And Regulation

Consistent with my notion that credit unions are often somewhat more conservative in action than are banks, they are also somewhat slower to implement technology, despite having equal access to it. Smaller credit unions have more trouble than large ones on account of strains on small credit union earnings due to increased regulatory, specifically compliance, demands. Looking ahead, this could be a source of continuing challenge owing to the supposition that technology is going to be an increasing part of any financial institution’s future.

Mission And Threats

As I mentioned, banks and credit unions have different missions and different visions. I don’t see banks as swaying from their missions. I do sense that credit unions are tempted to alter their core mission due to the increasing competitive environment. Credit unions are moving into fields not traditionally theirs — for example, insurance, investment, and private financial services. Doing so can have two consequences. One is that new fields require experienced talent — the hiring of which can be a tricky endeavor — and a high initial capital outlay. The other is that new fields can divert credit union boards and management from their primary and traditional focus, that of delivering the best possible value in the products and services they offer to the average retail member.

— As told to Brooke C. Stoddard