Members deserve it.

Think about what the CAMEL rating system is used for. It is a “a method of evaluating the health of credit unions by the National Credit Union Administration(NCUA).”1 Members deserve to know what the outcome of this analysis tells about the credit unions they own. Yes, I know that every credit union publishes reams of financial data for members to evaluate, but given the general complexity of financial statements, believing members will understand them requires quite the leap of faith.

Adding the NCUA’s 5-point CAMEL score to other data released to members will do no harm, and in fact will give members a simplified scale allowing them to pick up on serious issues – and perhaps even drive them to exercise ownership-based engagement with board members elected to represent their interests.

Some have argued that releasing a bad score might cause a run on credit union deposits. Any argument that includes the word “might” is rather weak to begin with, but beyond that if a credit union is getting a deserved 4 or worse they should be communicating to members regarding the problems facing the institution well before a score is even published. A 4, or any other rating for that matter, should not be a surprise if member-owners are well-informed to begin with.

In any case, I do think there is something more to the NCUA’s concerns regarding the release of CAMEL ratings than whether the act is legal (it is not, according to NCUA commentary). Consider this…

NCUA examiners have used threats of CAMEL rating downgrades in order to facilitate operational changes they believe are required in order to reduce risk at certain credit unions they are examining.2 Should publishing CAMEL scores in the public domain become an acceptable and legal practice, the potency of their threats would severely decline.

Certainly on occasion the changes demanded by regulators are warranted, but not every time. Sometimes the changes requested are based on erroneous assumptions made by individual examiners. In my opinion, knowing that the results of their exam would become fodder for public discussion would eliminate some of the more subjective aspects of the examination process. I don’t believe NCUA really wants the subjective removed from the process – hence the vigorous stand against CAMEL rating disclosure.

(I have a funny story I would love to tell that is very related to this last point, but it would get a client of mine in some hot water if I were to share it – which I suppose proves the point I am trying to make.)

The NCUA rebuts arguments for CAMEL disclosure, after stating the illegality of such an action, by saying that the release of CAMEL data “could” threaten the NCUASIF. They seem to envision legions of members stampeding the vaults of credit unions marked with a scarlet number 4, or 5 and thereby causing expensive credit union failures. In this argument, however, we see the word “could” – which is quite close to “might.” What proof do we have that this could happen? None. It could just as easily lead to strengthening the NCUASIF as it could to weakening it.

In his comment to one of the industry’s trade publications, the CEO of the credit union that published its CAMEL rating, Jim Blaine, was quoted as saying there is no harm in shining a little light under the rock. To that end, Jim let it be know that his credit union’s CAMEL rating was a 2 on a scale of 1-5, with 1 being the best. That’s a pretty good score.

Perhaps the credit union community should take a page from Bank Transfer Day and hold a CAMEL Rating Release Day. All together, all at once, let’s shine a little light under the rock. What great harm will it (not could it) do?

–

Note:

Glatt Consulting publishes the Credit Union Industry HealthScore, which is based on the combined health scores of all federally-insured credit unions. The HealthScore is similar in structure to the CAMEL rating system, though in our case 5 represents the strongest possible score and 0 represents the weakest. We typically do not publish individual credit union scores, but taking the lead from Mr. Blain, State Employees Credit Union of North Carolina has a HealthScore of 3.455,. This is well above the national industry score of 2.341.      

Footnotes:

1: Wikipedia

2: This statement is based on commentary received from Glatt Consulting clients as well as direct conversations with members of the industry press, who have confirmed having similar conversations with credit union leaders across the country.

In either case, the material included in our 2012 Strategic Planning Proposal is designed to show how Glatt Consulting’s planning process will help your credit union define distinctive, relevant and actionable strategy.

Before we delve into process, you need to understand how we break down the elements of strategy at Glatt Consulting, or in other words what constitutes our philosophy regarding strategy. We define strategy as the combination of the following:

• A proper and clear operating “context”;
• A defined set of expectations regarding financial “health”;
• Connected and supportive tactical strategies;
• A relevant, focused budget;
• Defined assumptions and expectations regarding future financial performance.

Within the overarching Glatt Consulting strategy philosophy are two terms that are central to our work with clients. These terms are context and health.

For us, context is what defines the scope and focus of the operating environment. Clear context provides a framework for all subsequent decision-making, and helps distinguish success from failure. A credit union that lacks a clear operating context runs the risk of diluting its resources and perhaps undermining its ability to compete. We believe that establishing clear context is a critical starting point in strategic planning. A defined context serves as the foundation for all other strategic decision-making.

Health is freedom from financial ailments. It is vitality and strength that allows for growth. Good health is an enabler, poor health an impediment. A credit union that has no formal understanding or expectation with regard to “healthy” financial performance will not be able to determine whether its strategic efforts are leading to long-term health or steady decline. We believe that established benchmarks that define acceptable health provide a means to test the soundness of strategic decisions, and a means to evaluate the quality of ongoing performance. 1

Why is understanding our philosophy important?

Understanding our philosophy is important simply because we stay within the boundaries of our process, we use our terms, we use our tools. Some credit unions prefer to simply have a facilitator work within the credit union’s own planning process or within the confines of the credit union’s own philosophy on strategy. If that is what you prefer, then Glatt Consulting is probably not the resource you’re searching for. If, however, you are open to a distinctive, creative, proven process and the introduction of new strategic language at your credit union, we encourage you to explore the process descriptions included in our 2012 Strategic Planning Proposal.

Now What?

• Download a copy of our 2012 Strategic Planning Proposal.
• Contact us to discuss our process, or to schedule a 2012 planning engagement.

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1: Information further describing our perspective on credit union health can be found in the Credit Union Industry HealthScore section of our website. We make use of our HealthScore system throughout the planning process.

Here is an example. I once had to deposit a check I received in the mail. Most members at that time would have driven to the branch, walked in, completed a deposit slip, waited in line, etc. to make such a deposit. I simply gave my paperwork to the head teller with instruction to deposit it to my account. No waiting!

Why does the difference in experience matter? Who cares if a member and an employee have distinctly different processes of interaction with credit union service?

I’ll answer that question with two illustrations.

First, another employment experience. About two years after joining the credit union community I was working in the call center of another credit union in Virginia (yep – AWAY from the cash!). A member called in to ask how to use an ATM the credit union owned in Washington, D.C. I was stumped. I was stumped because I never used our ATMs. As an employee, my interactions with our account access services consisted of doing the same thing I had done as a teller. Namely, hand my stuff to the head teller to process.

I put the member on hold and asked around. No one in the call center knew how to use that ATM either. We ALL interacted via back office connections. NONE of us used our ATMs. The member was left in the lurch.

To my second illustration. This one has to do with failed mergers, which is a topic of great interest today given the news of two different mergers failing to win member approval via the voting process.

In the case of both attempts, the communication to members describing the value of the merger left a lot to be desired. What I believe is that the individuals drafting the communication to members regarding the benefits of these mergers left out answers to key questions members were likely to have. I do not believe this information was left out intentionally, omitted by design, but rather left out because of the assumptions made when creating the material.

Consider the statement below, communication regarding the rationale for merging sent from a credit union involved in one of the failed merger to its members:

The main reason for a merger is to enhance the services, convenience and benefits to members of both credit unions and the communities we serve.

This makes great sense if you are the credit union, but only because of what you foresee happening as a result of the merger. Such foresight is formed as merging credit unions discuss the opportunities a merger would bring about. There is a bright, shining future embedded in the statement above…but unfortunately you have to be an insider to see it. Members are not insiders.

“Enhance the services” and “convenience and benefits” are likely references to something grand and specific – only members are left in the dark about those specifics. Darkness enhances the fear of the unknown…and perhaps leads to being “paralyzed with fear.” If you are paralyzed, you don’t move.

Now, the members of these credit unions were probably not at that level of fear, but nonetheless they were certainly resistant to change. What they knew seemed perfectly fine when compared to the vague promises of what they might get via a merger. The “unknown” may have been a major motivator for some to vote no.

All this is to say that credit union leaders too often make decisions based on insider perspective, all too often communicate to members based on insider perspective, all to often deliver service based on insider perspective. Sometimes this works out, but more often than not it leads to disconnections between a credit union and its members/owners.

Every now and then, make sure to take a look at your strategies and plans for execution from the outside-in, and assume nothing when you do this. You may find that what you are saying to members through your efforts and actions make no sense to anyone but you.

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For a great article of where disconnections lead, read “Why Best Buy is Going out of Business…Gradually” by Larry Downes at Forbes.

I thought I would do some digging into the root cause of this stellar performance, both to satisfy my own curiosity and to share with GCLLC strategy consulting clients perhaps a few game-changing success stories. I turned to the database that runs our Credit Union Industry HealthScore for background on the underlying data and what I found was….kind of pathetic.

In this particular state, 48 out of the 101 credit unions actually saw membership declines in the 3rd quarter of 2011. Nationally, 3,895 credit unions out of 7,324 saw declines. The reality of the credit union experience is far from the reality suggested by the press release. The “real reality” is that that some credit unions are growing, very well, and compensating for the horrible member growth numbers of their peers.

Now I know that some reading this post will comment (or at least think) that membership growth is not necessarily an indicator of a healthy credit union. That some credit unions choose to shrink membership as a strategic measure. That calling out credit unions on membership growth is ill-informed.

These are all valid points, but know that my rage is not against the membership growth numbers, per se. It is against the practice of taking mediocre performance, and spinning it into a rosy picture of excellence. Credit union associations do it, leagues do it, and individual credit unions do it. Average, or in many cases below average, performance is not a winning proposition no matter how you spin it.

I suppose it wouldn’t bother me as much if I believed that most credit unions were doing their best to do their best. The way I see it, however, is that some credit unions are doing their best to do the least.

Before you pile on criticisms of this post based on a belief that life is hard for credit unions, especially the small ones, let me share that there are PLENTY of small credit unions doing exceptionally well. Size and operating complexity are not valid excuses for poor performance, and at some point “the economy” isn’t either.

Why don’t we dispense with the press release pleasantries and get down to brass tacks. For nearly half our industry, metrics reflecting loan growth, deposit growth, member growth, earnings growth and the like are embarrassingly bad. Let’s acknowledge this fact, and then work to do something about it.

There are many means to driving across-the board performance improvements and elevated industry health. Real cooperation on expensive back-office functions, accelerated merger activity, tough love (vs false praise) for floundering credit unions are but a few, not to mention better strategic planning at individual credit unions (shameless plug).

On the note of better planing, it is critical that the boards of poorly-performing credit unions re-establish their rightful role of holding management accountable to credit union performance. Planning, an exercise in which both board and management should participate, is where expectations are set and accountability defined. And it is this set of expectations/accountabilities, the internal definition of success, that the board should compare its ongoing performance to – not what some industry pollyanna promotes in a press release.

And lest I leave you with the despair that often accompanies vitriolic criticism, consider the “other half” of the credit union community. There are thousands of credit unions of all sizes and complexities that regularly outperform both credit union and bank peers. These are the success stories we must seek out and extoll. These are the credit unions that we must separate from the pack of statistical data and hold up as a collective exemplar of intelligent leadership and sound strategy.

To do otherwise is to leave ourselves mired in the mediocrity of the average.

If you are online today, take a few minutes to listen to one of the best speeches ever given.

http://www.americanrhetoric.com/speeches/mlkihaveadream.htm 

Sincerely,

Glatt Consulting, LLC 

Event Description/Details

This session will cover the fundamentals of credit union operations, including the relationship between loans and deposits, cooperative ownership, and income and loss.

A PDF of the session handout is available at: Elise Wolff Career Day Session Material

# # #

Media Contact Information

Tom Glatt, Jr.
Glatt Consulting, LLC
Tel: (888) 217-5988
Email: info@glattconsulting.com

We are currently scheduling 2012 strategy consulting engagements. Engagement opportunities are limited to ensure a high level of quality service for clients. Schedule your engagement today! Call (888) 217-5988 to discuss our process and resource availability. You may also complete our online contact form.

Learn more about our distinctive thoughts on strategy consulting.

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About This Video:

What is this “Credit Union Industry HealthScore?” In a nutshell, it is a composite financial performance score reflecting the combined financial health of all federally-insured credit unions. This video walks through the formation and use of the score, and its place as an industry accountability metric.

Follow GCLLC:

To stay up-to-date on the latest Glatt Consluting, LLC industry commentary, news and HealthScore updates, subscribe to our blog or follow us via:

• Twitter at twitter.com/glattconsulting
• LinkedIn at http://www.linkedin.com/company/glatt-consulting-llc
• Google+ at https://plus.google.com/101758979269564400968/posts