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Loan interest income may be overstated in the budget if there is a large balance of non-performing loans. This occurs if loan income is budgeted based on what the members are contractually obligated to pay rather than the actual payments received on performing loans.
Here are the two most common ways credit unions are adjusting for this:
The decision between the two paths often comes down to how you handle non-performing loans in your database, data processing/reporting capabilities and the style of budgeting that is used.
The frequency and magnitude of surprises in 2009 have created a unique learning opportunity that should not be passed up. Too often, after navigating through a strategic challenge or opportunity, managements move on to the next issue without identifying the lessons learned from the most recent experiences. This need not be a complex exercise. In fact, identifying lessons learned can be as simple as answering:
Determining why something happened is the key to the lesson. For example, assume that auto loans have grown 10% so far in 2009. It might be tempting to identify the lesson learned as: Even in a down economy, we can grow auto loans at a double-digit pace. However, the real lesson to be learned lies in why they increased. For example:
It may not be possible to be certain why auto loans grew, but it is possible to explore the potential reasons and draw a conclusion.
In analyzing lessons learned from the unprecedented events experienced in 2009, also consider key areas of the organization and environment that are impacted:
While the previous five issues are key, taking the time to discuss and document lessons learned from any recent experience is invaluable. Such a process leads to better decision making, fosters strategic thinking (in a time when many are consumed with putting out fires) and creates opportunities for cross-departmental learning. As a result, the organization is stronger and better able to address challenges and take advantage of opportunities when they arise.
This statement sounds eerily similar to the statement we heard from many people in 2008 about 2009.
By now most have read or heard the U.S. financial highlights for 3rd Qtr 2009. Headlines touted the 3.5% annualized growth in GDP. It is important for any business to evaluate the sustainability of this “good news” and how long it will take to have positive impact as they are making financial and business decisions, especially for 2010 and quite possibly through 2011.
We are starting to hear from many credit union managements and boards that they believe PLL will begin to decline and loans will start to increase in 2010. While everyone hopes this is the case, there is still a tremendous amount of uncertainty. Therefore, we believe it is beneficial to… hope for the best, but prepare for the worst for at least one more year. This means evaluating various scenarios for financial performance instead of landing on, or promising, one set of financial numbers to your board. This effort can go a long way to appropriately managing expectations and reducing frustration for all stakeholders.
A few reasons we bring this to light. Consider the following:
While the recent GDP growth would seem like good news on the surface, further evaluation of the numbers suggests that there could be more trouble ahead and a sustained recovery is not necessarily underway. In looking at the details, a considerable portion of the growth in GDP was a result of government spending, including the Cash for Clunkers program. The Cash for Clunkers program factored into the consumption/consumer spending portion of the GDP equation and certainly did help to increase auto sales over the summer. However, it “pulled sales forward,” which means auto sales figures are likely to be far less rosy in the coming months. Consumption is critical, as it has accounted for 70% of the economy since 2002 (67% 1929 to 2008). If Americans are uncertain about their jobs or the economy (consider consumer confidence falling to 47.7 in October), they will likely continue to save, putting further pressure on GDP growth and ultimately job growth going forward.
While the economy did grow in the 3rd Qtr, it did not translate to any net improvement in the unemployment picture. Unemployment has continued to rise, from 9.8% in September 2009, to 10.2% in October 2009. From a historical standpoint, unemployment is at its highest level since March 1983 when it stood at 10.3%. (For perspective, note that unemployment was at only 5.0% a short 18 months ago.) Unemployment is a lagging indicator, meaning that even after the economy ultimately stabilizes and begins to grow, it is likely that unemployment will to continue to increase for a period of time. In looking at historical data, some post-recessionary periods have seen quick improvement in U.S. employment, while others have not. For the recession ending in March of 1975, unemployment peaked 2 months later in May of 1975 and then began to fall. However, when the 2001 recession ended in the 4th Qtr of 2001, the unemployment rate stood at 5.7% and remained at 5.7% or higher until April 2004. Some economists believe we are headed toward the slower job recovery scenario seen in the years following the 2001 recession. Either way, as noted earlier credit unions might be wise to consider the old adage… hope for the best, but prepare for the worst.
Source Data:
http://www.gpoaccess.gov/usbudget/fy05/hist.html
http://www.cepr.net/index.php/data-bytes/gdp-bytes/c4c-drives-growth/
Last week, we identified some of the many threats to earnings. With regard to non-interest income, potential changes in regulation were identified to be a major threat. Building on that, here we would like to suggest changes in consumer (i.e., member) behavior as an additional threat to non-interest income. In these trying times, consumer behavior has evolved and people are spending less and saving more. Both of these actions sound like responsible things for consumers to be doing (and they are), but for your credit union, they likely translate into lower earnings. Many places we are working with are reporting decreases in both interchange income and overdraft (or courtesy pay) fees. Members are also working hard to deleverage themselves, leading to lower loan volumes and fewer late payment fees. Whether these are short- or long-term behavioral changes is a topic for debate, but, for the present, credit unions are feeling the impact.
If you aren’t already, make sure you begin to analyze the sources of your income inside and out. Do not merely look at your level of non-interest income as a whole, but understand the components of it and how they are changing. Many credit unions are seeing higher overall levels of non-interest income due to extraordinary mortgage originations. This extra income may be hiding declines in other areas, or increases in operating expense. While higher-than-normal levels of origination income may be helping your earnings today, they most likely are a short-term source of extra income. Sooner or later, interest rates will rise (no predictions here!) and/or the refinance boom will end and mortgage volumes will fall.
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