It’s natural to wonder when things will get back to “normal.”  But week after week, the only thing consistent in the economic indicators is that they are not consistent.  So how do we plan for the future?

Most credit unions are designed to thrive in a different type of economic environment─one we may not see again for a long time.  Yet opportunities exist in every environment.  The key is the ability to alter our mindset and look for ways to take advantage of the current reality.

Try test driving the scenario:  “It is 2015 and we are thriving.  The economy is about the same as it was in 2010.”  What did you do to thrive?  How is your strategy different than it was in 2010?  Instead of looking for a “magic bullet,” consider staying true to your core business and improve areas of expertise.  For example, there may not be much loan demand at the moment, but by truly understanding what your target market needs and values, you can work toward getting more of the loan demand that currently exists.

Also, many institutions are focused on cutting costs; according to NCUA’s aggregate FPR for March 2010, there was a 36% decline in the industry’s average operating expense ratio from March 2009 to March 2010.  However, keep in mind that some cuts are not sustainable, such as pay cuts and leaving critical positions vacant.  While they may be necessary in the short term, work toward sustainable cuts like improvements in processes and strategic changes in product offerings.  Consider the following statistics from the Harvard Business Review’s July-August 2009 readers’ survey, How Bleak is the Landscape?

• Only 27% of businesses surveyed are streamlining product or service offerings
• Only 34% are reengineering processes
• Only 37% are improving current products, services or customer support

Rather than hunkering down and waiting for the storm to pass, meet the storm head-on.  Stay focused on strategy and never stop thinking about ways to improve your business.

For months many have been watching and wondering when the inevitable increase in market rates might materialize.  Now, with some economists projecting that rates will stay at historic lows for another 12-18 months, credit unions should evaluate how, or if, they can continue to maintain net interest margin and ROA.

Not all institutions have room to lower deposits enough to mitigate the continued erosion in the yield on assets.  In a sense, deposit pricing is reaching a “floor” for many credit unions.  All else being equal, ROA will continue to erode and interest rate risk profiles will weaken as higher-rate loans and investments roll off, being replaced with lower yielding assets.

So what should credit unions do?  Common strategies include looking beyond the margin and evaluating expenses, as well as potential new sources of non-interest income.  As mentioned in previous posts, some institutions are stretching for yield, either in loans or investments.  If this strategy is employed, institutions need to carefully monitor the impact on the risk profile, and make sure decisions are tested beforehand and fit within the credit union’s philosophy and A/LM policy/guidelines.

Finally, some institutions have chosen to not take any drastic steps at this time, and have instead begun to adjust expectations at both the employee and board level, re-evaluating what success looks like in this environment.  One potential saving grace is that loan losses seem to be stabilizing in many areas, but should not be taken for granted given what institutions have experienced over the last two years.

We have received many calls on the NCUA Concentration Limits Supervisory Letter.  Credit unions are asking us what limits will satisfy NCUA or if there are any standard limits.

The answer is:  there is no standard answer.  This was stated by NCUA in conversation along with NCUA’s statement, there is no magic formula, during a webinar hosted by NAFCU on June 2, 2010.

Before establishing concentration limits for policy, we think there are several key questions that need to be considered.  Following are just a few:

• What types of concentration limits are appropriate for our credit union?
• Should we focus on classes or concentrations within classes?  If concentrations within classes, how much should we drill down?
• How will the newly established limits impact our strategic plans, business decisions, earnings and competitive stance?  Test drive potential scenarios and business decisions your credit union may want to make to see the potential downside of proposed limits.  Keep in mind that the supervisory letter is not limiting the discussion to assets.
• What is our rationale for determining concentration limits?  If we are experiencing unacceptable losses with our current concentrations, will we set concentration limits lower than our current levels?
• How will we respond if we reach a designated limit?  Will we shut down our program?  Will we sell existing holdings to make room for new business?
• Will these new limits prevent our credit union from taking too much risk, or will they result in unintended consequences of taking more risk?  For example, if you reach your limit on typical products, will you begin adding products where there is limited expertise in order to increase earnings?
• Do absolute levels of concentration cause too much risk?  Or, is it the rate of growth in a particular concentration?  Or, is it the rate of growth in concentration during an economic boom?
• How will we aggregate multiple limits to ensure we are not missing the big picture?

Because this decision will directly impact strategy, business decisions, day-to-day operations as well as competitive stance, we encourage decision makers to think through what is best for their credit union rather than take the easier route of using generic limits.

Keep in mind that that in the supervisory letter, NCUA states, “A material red flag is a credit union that simply raises the established limit when it is reached without advanced analysis supporting the rationale for the change in policy.”

If you would like help thinking through what would be best for your credit union, please contact us.

According to NCUA’s first quarter data, shares grew an average of almost 11% (annualized) while loan growth declined 4.76% (annualized)─over a 15% differential.  Funds not loaned out are sitting in investments (generally not earning very much) and are putting a squeeze on the margin.  With loan demand down, many of our clients are requesting what-if scenarios on purchasing longer-term investments with these “excess funds” to pick up a little extra yield.

While running what-if scenarios on the asset side of the balance sheet is a good idea, don’t forget the other half of the equation.  Another common theme we are seeing is an increase in non-maturity shares and a decrease in CDs.  This certainly takes some pressure off the cost of funds today, but it could be costly to mistake a potentially short-term member adjustment to current market conditions for a long-term trend.

At many places today, the rate differential between a money market and a CD is not that big—so it seems that members are willing to give up a few basis points.  But for what? Are your members sending you a signal that they are positioning themselves to move to the stock market as soon as “things turn around?”  Or back to CDs when rates tick up some?  We recommend that you test out these potential scenarios, and more, to help you get a better handle on how things could possibly play out in the future.