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Loan Growth: Seven Ripples Through Your Main Office
Wednesday, August 24, 2016 6:35 AM

By Anthony Burnett, Level5

Callahan & Associates has reported that loan growth for credit unions is on quite a run. In fact, credit unions are riding an 8-quarter wave, resulting in double-digit annual loan growth over the last two years. Improving economic characteristics and pent-up demand following the recession are driving consumers to purchase automobiles and mortgages in markets all over the country. For credit unions, this is great news, allowing many to thrive.

However, with growth come challenges for today and tomorrow. For today, credit unions are challenged with servicing and processing this business. For tomorrow, credit unions have to position for future growth as well as outpace and out-position the competition, all while serving an ever-evolving membership.

Main Office Transformation
Let’s consider the ripple effect of loan growth on the credit union. These ripples touch on the areas where loan growth exerts pressure, creating the need for a strategy to deal with the pressure. For each component below, the credit union must address:

  • Scalability – How do we provide for the future?
  • Flexibility – How do we build in the ability to change?
  • Proximity – How does the credit union engrain its culture across departments?

Lending Department
The most obvious and intuitive area where loan growth exerts pressure is the lending department. After all, it’s their fault we have all these loans! On a serious note, increasing loan volume puts increasing pressure on the department. The entire sequence of activity—originating, underwriting, processing, closing, packaging, and selling—must scale with loan volume. A variety of organizational structures and processes define how a new loan moves through the institution. Along the way, the people and technologies that touch the loan must be accommodated.

Loan Servicing
Once the loan is closed, servicing activity begins. While this is a given, it is also an activity distinct from the loan originating/underwriting function. Loan servicing can be greatly impacted by technology that promotes efficiency; it's also subject to the cyclical fluctuations in the lending market. Hence, scalability and flexibility become important features in planning. Depending on the credit union’s operating philosophy, locating it in close proximity to the lending department may also be desirable. Proximity can help build and sustain a cohesive lending culture and can provide a form of feedback to originators and underwriters.

The inconvenient truth about lending is that sometimes loans don’t perform as planned. The collections department must step in and manage the process of getting the loan back on track or recovering the collateral. As with the upstream lending functions, requirements for collectors rise and fall with the economic cycle. Further, their requirements for staff and space are influenced by the credit union’s underwriting philosophy. Some credit unions choose looser underwriting standards to accommodate higher rates for higher risk, and they understand that higher delinquencies are a natural consequence of that decision. More conservative credit unions choose higher underwriting standards and argue that lower loan yields are mitigated by the decreased costs of collections (staff and space).

Contact Center
The contact center may be tied to the servicing function mentioned above, or it may operate independently. In either case, increasing loan volume will boost the requirement for member communication. Intuitively, this is manifest in cases of members calling, emailing, texting, and chatting with the credit union to address routine or unusual questions about their loans. 

A second aspect to the contact center is outbound sales. As part of the onboarding process, particularly with indirect loans, this may mean periodic calls, emails, and texts to the member to make them aware of additional products and services that would benefit their financial lives. Scalability is an ingrained factor here, assuming the contact center also fields member inquiries on a broad range of topics, not just lending. Privacy is often a concern in planning for this function, as undue background noise can distract from the conversation, diminishing the credit union’s professionalism and tarnishing the brand.

Increasing loan volume increases the burden for compliance. However, strong policies and procedures that are consistently followed can reduce the need for greatly expanded staff to handle these chores.

Because success breeds success, new loans create the opportunity for add-on sales and subsequent member development. Marketing is directly involved in this activity, although the impact of increased lending is usually not linear in terms of pressure on staff and space.

Of course, someone has to keep track of all the dollars and cents flowing through the organization, and, hopefully, the new loans are generating plenty of dollars and cents. Like marketing, accounting is an area where the increased volume has a minimal impact on staff requirements.

Plan to Ride the Waves
The planning process to address the effects of growth is straightforward in concept, although there are some details that are critically important. At a high level, the process goes something like this:

  • Forecasting
    Using the credit union’s best crystal ball, the organization needs to forecast and project where it will be over a 5- to 10-year horizon in terms of loan growth. This usually leads to a healthy discussion of portfolio mix, products that should be added, products that should be deleted, participations, and commercial/consumer mix, etc. Sober thinking is required. The temptation to “aim for the moon” will result in overestimating requirements, if the results are not achieved. Conversely, sandbagging makes achieving desired results easier, but tends to understate future space requirements. As a result, the credit union may find itself on a treadmill, constantly trying to add resources, and space—losing efficiency and profit as a result.
  • Calibrate
    Most of the functions mentioned above can be calibrated. The exercise at this point is to establish benchmarks and calibrate each function based on the loan growth projection. Questions naturally arising during this activity include insourcing and outsourcing functions, changes in technology, and changes in organization or operational processes. The end result of this effort should be a staffing model forecasted in conjunction with the loan projection.
  • Allocate
    Once the staffing model is in place, space can be allocated for each function, based on the calibrated personnel forecast. In this phase, the common functions also have to be considered: file rooms, conference rooms, break rooms, etc. Combined with the staffing model, the space allocation yields the planning requirements for the functions impacted by growth.
  • Program and Plan
    In concert with design-build professionals, the credit union’s representatives will develop the program (i.e. the instructions to the design-build team that ultimately define the facility that will support the staff).

Connecting the Ripples
Most credit unions welcome the ripple effects of loan growth on their main office because it allows the credit union to continue providing its value proposition to the community and its membership. However, addressing the growth takes a steady hand and a team to get it right.

Level 5 is an endorsed business partner of Credit Union Resources, Inc., a wholly owned subsidiary of the Cornerstone Credit Union League.