For those credit unions that have been led to believe the path to prosperity lies in focusing only on members with spotless credit, Teri Robinson has a message for you:
Don’t believe the hype.
In engineering a stunning turnaround of Pacific Northwest Ironworkers Federal Credit Union, the CEO of the $10.6 million asset institution in Portland, Ore., placed her faith in a variety of tools designed to serve underserved consumers and those with marginal credit histories.
She was rewarded mightily.
“The NCUA has us thinking, only lend to A, A+ borrowers. That’s not true,” Robinson told a Community Credit Union & Growth Conference breakout session.
Hit hard by the recession, Pacific Ironworkers Federal fell into the net worth restoration program, bottoming out at 4.8% in January 2010. Examiners focused on four areas, according to Robinson: risky borrowers, higher than peer loan yield, higher than peer income, and higher than peer operating expenses.
Her curiosity piqued, Robinson analyzed her books and made a surprising discovery: Pacific Ironworkers Federal attributed 80% of charge-offs in 2011—and 60% the following year--to members with A+ to B ratings.
“I wasn’t losing it on the riskier members – I was losing it on the members who could chase rates,” she said.
Pacific Ironworkers Federal’s most loyal members constituted that at-risk segment, Robinson said. She decided to earn back their business from predatory lenders, who were charging members an average annual percentage rate (APR) of 29% compared with 16% for the credit union’s average D-rated borrower; some even qualified for a C rating and an 8.75% APR loan.
By mining credit reports, Pacific Ironworkers Federal identified loan conversion candidates. Again, the results might be surprising: Robinson cited a school teacher who makes $70,000 annually as a regular payday loan user.
“I figured, if they’ve been making that payment at 36% for 12 months, why not get that loan over here by me?” Robinson said.
In April 2011, Pacific Ironworkers Federal obtained a Community Development Financial Institution designation, creating regulatory flexibility. An infusion of secondary capital boosted the credit union’s net worth from 6.61% in January 2012 to 8.2% as of August 2013. Pacific Ironworkers Federal’s loan growth increased 35% in 2013, hitting $10.5 million.
This year, Pacific Ironworkers Federal granted 47% of its loans to C-, D-, and E-rated borrowers, had a loan yield of 8% and increased its portfolio by $5.7 million. It boasts a 1% delinquency rate, and a 101% loan-to-share ratio.
The National Federation of Community Development Credit Unions considers a lot of theories, says Blake Myers, a Federation consultant. “But it’s people like her on the ground that prove it can happen. She’s created a fair product that also works out very well for the credit union.”