By Dennis Gibson, CSE
As this is written on Jan. 1, 2009, many, many people are thankful that 2008 has been left behind. The numbers tell us that the final quarter of the year just completed was the worst for the nation's economy since 1931. There is widespread belief, however, that the quarter has taken us near the bottom for this round, and signs of the beginning of recovery will be seen as early as mid-year. This, of course, is merely conjecture, and remains to be seen.
The direction in which the economy spins will have a basis in the decisions made and enacted by the incoming administration and the, virtually, single-party control of Congress (I say "virtual" control, as the potential for Republicans to filibuster in the Senate remains a possibility). But how does all this affect Credit Union Land, and what actions are needed from each credit union's leadership?
The two functions each credit union must succeed in fulfilling are:
serving the financial needs of its members and remaining financially solvent.
Most certainly, the country's economic recession is providing a number of stumbling blocks for credit union leadership as attempts are made to succeed in accomplishing these key tasks.
As in any viable business, managing a financial institution's revenue and expense, in order to provide for a positive bottom line and a stable (or even growing) capital ratio, is paramount. If any credit union does not have a plan/budget in place as of the first business day of the year, then, perhaps, new leadership should be considered. One cannot count on luck—particularly in such an economic turmoil.
The key to the plan's success is the timely and correct control of the asset/liability function, and the associated maintenance of proper pricing. In a business environment with financial issues and problems coming from, seemingly, endless directions and points of origin, where does one invest and receive a viable return on the investment? The traditional investment vehicle for credit unions has been consumer loans. However, consumers have slowed spending and the associated borrowing. In addition, many of those who have borrowed, or currently wish to borrow, are no longer in a position to assure repayment of the loan (particularly if loan policy has been adjusted to reduce the risk of loss).
The second traditional form of investment has been in the monetary marketplace (CDs, Treasuries, bonds and so forth), but the current return on insured investments (and uninsured investments are, quite likely, simply too much of a risk in the current economy) is very low. The rates, in fact, have hit record lows.
What is a credit union leader to do? Since there are, pretty much, only less-than-ideal places to invest, credit union leadership should price deposits as low as possible. This means as TRULY low as possible.
With Treasuries and fed funds at the .25 percent mark, how can shares be priced at upward of 1 percent, or even more; and how can money markets pay greater than the overpriced shares? Ultra-conservative pricing should be the mode, even if it results in a slowing of asset growth. The worst-case scenario results in some temporary asset shrinking, but a retention of a viable capital ratio.
Along with the lowering of liability pricing should come a maintaining of loan rates at mid-2008 levels, and a willingness to raise rates at any opportunity. While this may not sound like the "Credit Union Way," the recommendation isn't being made to increase spread and capture windfall profits (although maintaining a viable spread is necessary). It is being made due to the fact that once the current economic wounds have healed, inflation will be bombarding us like a barrage of cruise missiles. Leadership does not want to be two years into a large volume of five-, six-, and even seven-year consumer loans at a rock-bottom rate when this inflation comes thundering through. Does anyone remember the rates during the very early 1980s and the number of thrifts that failed as a result?
Is it a guess that inflation will hit, and hit hard? Not at all! The government is now printing money to provide for bailouts and stimuli to attack the current economic ills. Basic economics tells us that, no matter how wise or needed such action may, or may not, be in the near term, the result will be inflation once the economy begins to recover; and the amount of money being "created" assures tremendous inflationary pressures.
There is also the release of pent-up buying that occurs once consumer confidence (another measure that is at an all-time low) returns. After holding on to older vehicles and missing out on updated technology in consumer products, our general materialism will spur a recession-weary public to spend, spend, spend!
At the same time credit unions are keeping a close watch on interest rates, they must control operational costs. Consider whether all your organization's processes and procedures are up-to-date and efficient, and whether staff is performing up to the level called for by such demanding times. For example: How many credit unions would find that implementing Check 21-based clearings for deposits would quickly pay for itself, and soon begin to be an expense reduction? Many more than the number that have already initiated the process, that is for sure.
Another challenge is the loss of revenue due to fewer loans, more delinquencies and write-offs, and lower overall return on investments. While paying special attention to asset/liability issues should help to prevent such losses from being as bad as they could be, consider ways your lending policies could help to slow the growth of delinquencies, and review product pricing and sales penetration. You might be surprised at what you find! I entered a credit union that had an ancillary loan product line—credit life, disability, warranties, etc.—with sales penetration of around 20 percent. They were able to raise penetration to over 70 percent while lowering incentive costs.
There remain credit unions that do not charge late fees and/or still provide credit union paid life insurance on share accounts (and even on unpaid loan balances). Can the cost of these products continue to be borne by the organization in today's environment? There are many other potential product pricing issues within the industry, as well—any of which could be viable revenue sources. Tough decisions must be made with the benefit of the credit union as a whole outweighing the benefit to the individual member.
While there are a myriad of additional challenges and issues that should, and even must, be dealt with as a result of the economic times we are experiencing, I believe the three discussed here are key:
- a variable budget/plan under which asset/liability pricing is finitely managed;
- refinement in operational costs (process, procedure and staffing efficiencies) and
- improved sales penetrations and product offerings.
I believe, as well, that the recommended responses to each challenge have strong potential to help CU leaders fulfill their two key goals: serving members' financial needs while staying solvent.
Dennis Gibson, CSE, a former CUES member, is senior vice president of The Sequoyah Corp., Glen Mills, Pa., and Gladstone, Mo.
Read more about ALM strategies in our archive and in ALM Spelled Out—Second Edition.
