Box Elder County FCU is a $106 million credit union located in a rural and historically agricultural county in northwestern Utah. In recent years the credit union has performed well above average when measured by some of the most commonly used credit union metrics. ROA for the calendar year 2015 was 1.75% compared to peer of .54%. Over the last three calendar years ROA has averaged 1.77%. For the same three-year look-back period the net worth (capital) ratio increased from 21.3% to 21.9% and total assets increased from $86.6 million to $105.7 million. In this article we will examine both the financial and human nature of the credit union’s operations and discover why it excelled when many of its counterparts struggled.
First let’s take a quick look at the credit union and its members. Box Elder County Credit Union has its roots in the employees of the Intermountain Indian School dating back almost 60 years. The school, which was a U.S. Government facility, was closed in 1984. Prior to the school closure, the credit union’s Board of Directors successfully petitioned NCUA for a community charter to include the residents of Box Elder County. The County continues to be the credit union’s primary field of membership.
Box Elder County, Utah, has a population of approximately fifty-three thousand. It is located in the far northwestern part of the state. The credit union is based in Brigham City, the county seat, which has a population of about twenty thousand. The economic history of the county is founded on agriculture and it continues to be a significant part of the county’s economy. However, there has been progress in the private sector over the years. Competition-wise, Box Elder faces two, $2 billion+ credit unions that operate branches in Brigham City and another $100 million credit union based about a mile away. Additionally, several regional and national banks operate branches in the immediate area.
Returning to the analysis of the credit union, it doesn’t take long when perusing the NCUA FPR for Box Elder, to see where the credit union differentiates itself from its peers in the level of non-interest income that the credit union earns.
The credit union’s non-interest revenue provides income significantly greater than its peers. One might guess the members are pounded with outrageous fees. In reviewing the credit union fee schedule it is clear that this is not the case. Punitive fees, meant to discourage unacceptable behaviors such as NSF, are similar to the other credit unions in the area and are well below those charged by the local banking branches.
OK so let’s look at the generation of non-interest revenue. The bottom line for the success of the credit union in achieving an above-peer non-interest income lies in the success of selling insurance products and vehicle warranties to its members and the resulting commission income. This migration to a sales culture did not come easy. In fact it took many years. Loan officers often have difficulty transitioning to a sales environment. The principal products sold by loan officers are:
- Loan insurance; this is a package that combines credit life, disability, and income protection to the member.
- Gap insurance; covers the gap in coverage between the replacement cost for a vehicle and the amount the member collision coverage provides. The gap can be significant for newer cars and trucks.
- Vehicle Warranties; cover the cost for major mechanical repairs. Loan officers are expected to sell these policies and warranties. They are incentivized to do so. Sales incentives can make up a significant part of their compensation.
Approximately one-third of the loans written include at least one of the above offerings. The credit union is working towards a sales success rate of 40%.
Some experts question the value to the borrower with regard to these add-on products. Box Elder’s response is thoughtful. First, the coverage is optional and the loan decision is not driven by the sales success. Second, the cost to the member is significantly less than if the borrower were to purchase similar coverage from a dealer or third party. Lastly, the credit union sees these add-ons as especially suitable for paycheck-to-paycheck borrowers.
Members can choose to manage their personal finances as they will. But we all know that many borrowers live paycheck-to-paycheck with few or no resources to fall back on. Even the loss of one paycheck would be very detrimental. Insurance coverages and warranties make a lot of sense for these borrowers.
Lastly we know that incentivizing loan officers to make and add to loans raises a conflict for the officer. If a loan officer stands to benefit personally in the lending process, their judgement is subject to question. In order to maintain the integrity of the lending process the credit union utilizes a separate underwriting function to back up the loan officers. A loan officer who originates a loan and sells additional services for commission will require another loan officer to underwrite and approve the loan.
In recent weeks the issues of sales cultures and incentives to staff members to sell has come under scrutiny due to the actions of one giant bank. Hundreds or perhaps thousands of the bank’s employees have been terminated due to apparent irregularities at the bank. Well, first of all, most credit unions do not present the opportunity for such gross misconduct because of their small size and their orientation to member service. But it is a risk that needs to be addressed. In the next issue of CU ALM Report we will treat the topic of internal controls that will identify unlawful and undesirable conduct in those few instances where it happens in the credit union system.