Utah First Federal Credit Union continues to succeed and outperform the majority of its peers. Based in Salt Lake City, Utah, Utah First is not lacking for competition. It’s true that at $304 million, the credit union has resources that many small credit unions don’t. However, it is overshadowed in size, measured in assets and branches, by 11 larger credit unions in the Salt Lake City metro area where it operates. These include mega credit unions America First FCU at $8 billion and Mountain America FCU at $6 billion, with branches it seems on every corner. It also competes against all of the major banks for its business lending success— more on that later. Utah First has eight branches including its main office in downtown Salt Lake City. Darin Moody is the 32-year veteran leading the credit union. As CEO for the past 24 years, he is ably assisted by David Hill, CFO, and a staff of very experienced credit union professionals.
The credit union’s unique way of doing business has led to very strong financial results, summarized as follows: In its most recent call report, the credit union reported ROA of 1.5%, as compared to its peer group at .53%. Other benchmarks include loans to shares at 92% versus peers at 71% and yield on average loans at 5.5% versus 4.9% for peers. It has consistently performed in the top percentile of net income for many decades. Long-term success has allowed the credit union to grow from its humble beginnings to over $300 million in assets and a net worth ratio at 10.8%.
When we talk about humble beginnings, very few credit unions can top Utah First’s heritage. The credit union was founded in 1935 in the midst of The Great Depression. A group of German immigrants living in Salt Lake City were not having success finding the loans they needed to bring their families to America. They banded together to form the Utah German America FCU, under the then recently created Federal Credit Union Act. The original credit union booked 23 shares outstanding totaling $115. Subsequently, the name evolved to reflect the current nature of the credit union’s membership.
A Credit Union—Just a Little Different Than Most
When interviewing Darin and Dave, I was able to capture some of the concepts which make the credit union different. One clear strategy is to take profitable business that its competitor credit unions and banks often reject. The credit union’s goal is to be among the best lenders in the Salt Lake Valley. However, their methods for qualifying loan applicants differ a bit from traditional lenders. If you were to drive Interstate 15, which runs the length of the Salt Lake Valley, you would see billboards for many lenders advertising very low loan rates. Utah First won’t be among them. Its policy is to charge a reasonable rate which is acceptable to the member but not always the lowest rate on the street. Given their success in originating and retaining business, this approach has proven workable for Utah First.
Management professes that they will loan to anyone that can demonstrate a strong likelihood of repayment. The term “colorful credit history” was used to describe some borrowers. That doesn’t mean the credit union will loan to just anyone with a poor credit score. In addition to showing adequate resources to repay, applicants must demonstrate and explain credit failures and relate how they will overcome them. Risk-based lending is used by many credit unions, but Utah First appears to have taken it up a level.
An Example of Smart Lending
One example is the credit union’s short-term real estate purchase money program which was instigated at the height of The Great Recession in the previous decade. Credit union management felt that many homeowners, having had their credit tarnished by a short sale or deed in lieu of foreclosure, were actually good risks being rejected by major lenders. The credit union chose to waive the standard three-year post-foreclosure waiting period requirement for selected applicants. Utah First lent millions of dollars to this distressed group of borrowers on a short five-year balloon mortgage loan. The rates were not the lowest but were very reasonable in light of the circumstance. At least the borrowers must have thought so, as they participated in droves. This allowed borrowing members to replace their lost homes at favorable prices and then refinance several years later when their credit was restored. These members who were grateful to be able to replace their homes turned out to be loyal repeat borrowers. This was demonstrated as Utah First captured a large portion of the refinance business at the end of the five-year term. In this segment of its business, the credit union reported zero loan losses. It is typical of how the credit union does business a bit differently.
Heart and Soul
Of all those real estate secured loans, $60 million are classified as member business loans under NCUA criteria. Actually, this number is a little misleading. Because of the limitations on member business loans, the credit union has sold non-recourse participations on many of its loans. Loan demand for member business loans is steady and, at times, intense. Each member business loan is secured with a first mortgage and carries an average loan-to-value ratio at around 60%. Problem loans are rare. In its long history of business lending, the credit union has never had a loan classified at TDR (troubled debt restructure). Additionally, the credit union utilizes an audit firm with strong business lending expertise to review portions of its business loan portfolio periodically. Management reports that its regulator appears to have some confidence in the credit union loan practices. It appears the large real estate secured loan portfolio has not been a regulatory issue for the credit union in recent years.
As of its September 2016 Call Report, the credit union had borrowed $17 million in the internet CD market to fund its lending. The credit union’s investment portfolio comprises approximately 10% of the credit union’s assets and effectively functions as a liquidity fund for the credit union. The credit union also has lines of credit with the Federal Home Loan Bank and the Federal Reserve. Liquidity Risk does not appear to be problematic.
As mentioned previously, the credit union’s business methodology is not new. It has been doing this for decades. It has a cadre of experienced executives who are adept at identifying good borrowers and rejecting those who appear questionable.
Interest Rate Risk and Liquidity Risk
Real estate secured loans comprise almost half of the credit union’s assets. All of the mortgage based lending carries some credit union optionality in the rate and while repayment terms may extend out quite a ways, the credit union is able to lay off most of the rate risk. The credit union runs an in-house model operated by CFO Dave Hill. Dave models the credit union’s rate risk and liquidity risk at least monthly with more intensive modeling done on a quarterly basis. Dave is very experienced and knowledgeable and brings a high level of modeling expertise to the table. He runs multiple scenarios to stress the credit union’s exposure to the aforementioned risks. The IRR scenarios are very conservative, even forecasting non-maturity shares at or near par value and with very short decay speeds. Over the years, CEO Moody reports that regulators have become comfortable with their risk profile.
Not a How-To
This is not a how-to profile. Such an effort would be way beyond the scope of this newsletter article; but it does demonstrate that a midsized credit union with limited resources can prosper in the presence of intense competition from much larger and more visible competitors. Hopefully we have given you some ideas that may be helpful in improving profitability and service to your members. Your comments are always appreciated at Mark@markhsmith.com .