Q&A with Urum Urumoglu, Finance Director at the University of Wisconsin Credit Union

Oct 20th - CUNA Mutual Group - Dimensions
December 31, 1969

Urum Urumoglu is the finance director at the University of Wisconsin Credit Union in Madison ($735 million assets, 96,475 members). Urumoglu, a native of Turkey, joined UWCU in 2000, after getting a graduate degree from the university and working for a thrift. In each of the last three years, UWCU's returns on assets, equity, and investments, and its loan-to-share ratio, have been well above the average for U.S. credit unions of asset size $600-$800 million. In July, Glenn Harrison, managing editor of CUNA Mutual Group’s Dimensions, interviewed Urumoglu about credit union asset/liability management (ALM).

Q: Will rising rates help or hurt credit unions overall?

A: If you have an asset-sensitive rather than liability sensitive balance sheet, rising interest rates are going to help you tremendously. UW Credit Union has a lot of assets that will re-price faster than our deposits, so it's going to help us. Generally, most financial institutions raise loan rates a lot quicker than deposit rates. But if you are too rate-sensitive, when a competitor suddenly increases deposit rates substantially, it might push you to increase your rates a lot faster than you would like to.

Q: If you could give one piece of advice to someone from outside the credit union industry who was taking over your job tomorrow, what would it be? A: Credit unions don't exist to charge our members for every little thing. Example: If you go to a thrift for a mortgage loan application, it's a 20-to-30-minute bang-bang-bang job. But we do not take shortcuts to increase volume. We serve our members properly, so they understand the process better and can make better decisions. We're not going to nickel-and-dime you for everything, although there are structural fees we have to charge, because as a credit union it's imperative that members don't subsidize other members. Q: What's the most valuable capability of good ALM software? A: How well it can mimic your operations. For example, we have a big student loan portfolio. When most companies create ALM software packages, they don't think of student loans as such a big instrument, so that capability isn't strong. It’s a value issue. The models are all out there, but how much do you spend for it? If you're talking about the Cadillac model, yes it’s in there, but it'll cost you. If you want something more affordable that can do a decent job, you make some sacrifices. So first, identify your needs, and then select good ALM software. Q: What good is ALM modeling when you know you’re going to have to re-price according to unforeseeable market conditions anyway? A: If it's your strategy to satisfy your members only through pricing, there's no sense in using an ALM model. But if your strategy is higher-level customer satisfaction—or membership growth through serving the specific needs of SEGs— you can't do these things and still follow competitors' pricing. It will be too costly eventually.

Modeling is not an exact science, but it gives you a direction and sense of how the decisions you make will affect your balance sheet. There ARE commodity products that you have to price like competitors: some mortgage loans, home equity, lines of credit. But with your other products—consumer loans, certificates, money market, savings, shares—you don't have to follow the competition.

You have to have a long-term plan. Modeling helps you get there, but it's just one tool. Dissect every operation and understand what it means to your credit union. That takes a lot of quantitative calculations, and it means working with front-line people and members. I'm still learning. Q: If you could wave a wand and have every credit union board instantly understand one thing, what would it be? A: Interest rate risk. Credit unions should understand their balance sheets before they make decisions, especially about investments. A typical example: You go through a lot of gyrations to look at the risk characteristics of a mortgage-backed security. But when you're putting a mortgage loan on your balance sheet, you don't. The security is the same instrument, securitized and sold back to you with the same interest-rate risk characteristics.

If I can make [fixed-rate mortgage loans] at 7%, by the time I buy it back as a mortgage-backed security, it's probably at 6.5 or 6.375%. We give up too much for a false sense of interest-rate risk protection.

Another example: Everybody talks about raising rates to draw more core deposits: checking, shares, and money market accounts. But what if I'm the only credit union in a small northern Wisconsin town—my members are not going anyplace else, so why should I worry about that?

Don't just jump to follow everybody. Learn who you are first. Q: How can a credit union incorporate the mission of serving the underserved into its financial strategy? A: Serving lower-income people creates some risk, but it can be done. There are enough sponsor relationships, like with Fannie Mae and Freddie Mac to get secondary market help for mortgage loans, zero down payment, flex products, and things like that. Maybe people will pay a higher interest rate, but you can educate them on grants.

From the first through the fifth year, you may lose money on that strategy, but for the future, it can be really great. But you have to study the potential of each of these markets—you can't be everything to everybody.

I think the financial industry has to invest some energy to bring those products to serve this market. I pursued a career in financial industry in order to help needy people. I think the financial industry has gone from serving the lower-income and helping them own homes and things like that to serving the very wealthy because that's where the profit is. If we as credit unions are just chasing profit, we're no different from banks. Q: How can credit unions compete with payday lenders popping up in underserved neighborhoods? A: If you look at the risk and returns, there is enough profit for a credit union to offer these services without charging 30% to 35% of the paycheck or things like that. You have to make sure your interest rates and lending policies are well documented, and your board has given permission.

We have to put some pressure on our Congress or Senate or NCUA to allow us to get into that lending. If they do not allow us, and just look at it as getting riskier and riskier—we're not helping our communities grow. Because the people who need their one dollar to go further are losing it to fees to the payday lender. We have to return that money to those people so they have money to afford other things and they can be better long-term members for us.

I don't think we have to have branches everywhere, but we have to be visible. Establish relationships with community groups, do educational things. Make sure your program is well understood. You can't just go to these neighborhoods and say, "I'm another payday lender—drive 10 miles to come here."

Glenn Harrison is the managing editor of Dimensions magazine.This article is copywritten by CUNA Mutual Group (www.cunamutual.com) and is reprinted with permission from Dimensions.