DCU Bucks Conservative Credit Union Trend | How risky is too risky for local lenders?
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Tim Garner, vp of marketing and strategic planning at DCU.
The tale of woe from Wall Street over the last several months is a powerful reminder of what too much risk can lead to for financial institutions. Just ask Lehman Brothers.
But within the credit union industry there’s an internal debate brewing over whether the traditionally conservative institutions are too risk-averse.
And leading the charge for more risk is Marlborough-based Digital Federal Credit Union. By far the largest in Central Massachusetts, DCU ranks near the bottom of its peer group in the measure that the National Credit Union Association uses to determine adequate capitalization. That measure, called a net worth ratio, ranges between 6 and 7 percent for DCU. Most credit unions keep their levels much higher, with average levels over 11 percent in recent years.
But many in the credit union world say DCU is on the right track. They argue that other credit unions could learn from its example and relax their generally conservative standards.
Since 2001, NCUA has assessed credit unions’ capitalization with a ratio that measures net worth against total assets.
Score 6 percent or higher, and a credit union is considered “adequately capitalized,” with an acceptable cushion to handle bad loans or other setbacks. Seven percent or higher counts as “well capitalized.”
Rob Kimmett, senior vice president of marketing and public relations at the Marlborough-based Massachusetts Credit Union League, said a net worth ratio of 6 percent is generally considered very safe. Still, he said, one reason credit unions may want a lot of capital on hand is that they have fewer options for raising money than other institutions. If they need to build a building, he said, they can’t just issue some stock.
“Credit unions tend to be very judicious about their capital and how it’s deployed,” he said.
Making a Change
In the mid-1990s, DCU decided to buck the trend. According to Tim Garner, vice president of marketing and strategic planning, the credit union’s board of directors made a conscious decision to play a bit more freely with its money.
“The concern of the board was that we don’t want to grow the capital ratio to more than we need, because it’s basically on the backs of the members,” he said.
Instead, Garner said, the credit union decided to use the extra money to improve service, expand facilities, offer more interest on deposits and charge less interest on loans. Garner said the decision has been partly responsible for DCU’s enormous growth. The credit union’s total assets rose from $359 million in 1995 to $4.3 billion this fall.
Many in the credit union industry support the type of decision DCU made. A 2007 study by the Filene Research Institute, a think tank devoted to credit unions, questions why the average net capital to assets ratio rose from 7.6 percent in 1990 to more than 11 percent in 2000. It concludes that the 1990 ratio was reasonable, and perhaps even too high, and that by the mid-2000s, credit unions actually faced less risk, making them significantly overcapitalized.
Mike Schenk, a senior economist at the Credit Union National Association, said DCU’s position is part of an ongoing debate among credit union insiders about whether the institutions have excessive capital that should be returned to the members in some form.
“I would say it’s fairly well known within the movement that these guys operate specifically at a level below 7 percent so they maximize the value they give to their members,” he said.
Still, as the last year has shown, the question of what is and isn’t risky can be complicated. Observers suggest that there are a number of ways to look at DCU’s risk levels.
Ray Springsteen, senior vice president of business development at Callahan & Associates Inc., a consulting firm that serves credit unions, including DCU, said he likes the fact that the credit union’s loan delinquency rate is just 0.79 percent. That puts it in the lower half of its peer group for defaults, according to the NCUA.
“This is an example of a credit union that’s safe and sound,” Springsteen said.
He said that’s especially true since most of DCU’s risk is in loans to its members, not the sort of questionable investments that have endangered some large banks.
Fast Growth
Doug Petersen, executive vice president and CFO of Workers’ Credit Union in Fitchburg said it’s virtually impossible to judge another institution’s financial health from the outside, but he said DCU appears to be doing well. He said a credit union growing so quickly might worry about becoming undercapitalized as it offers more and more loans, but he said DCU has little to worry about since it is at least as profitable as its peers.“Overall it looks like things are going pretty well,” he said.
Workers’ itself has a much more conservative net worth ratio of 13.5 percent, but Petersen said he doesn’t see anything wrong with DCU’s approach.
John Reske, vice president of marketing at UMassFive College FCU, which is based in Hadley and serves college employees and students, said his credit union keeps its net worth ratio a bit lower than the average credit union to try to offer better services to members. It’s currently at 9.2 percent.
“If you have a really high cap, one could argue that maybe you’re not spending enough on your members,” he said.
Still, Reske said, credit unions are democratic institutions run by an elected board, so the decision of how much risk to accept is in the hands of the members. Different membership bases will naturally be more or less conservative, he said.
Garner said DCU’s size also makes it easier to take on a bit more risk. Equity of $271 million may be a small percentage of the credit union’s $4.3 billion total assets, he said, but it’s enough to absorb some fairly big blows.
“It’s typical that a small credit union is probably going to need a higher amount of capital,” he said. “Say two mortgages went bad and it would be a significant shock to their system.”
With many people having a tough time getting loans these days, Garner said DCU sees more need than ever to make whatever loans it can. And he said the credit union tries not to turn away qualified members.
“We’ve had a really strong year in terms of mortgages, home equities and auto loans,” he said. “Generally if the members come to us for the need, we try to meet it.”
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