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Now is the Time to Strategize on Investments

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After the Great Recession, credit union loan-to-share ratios declined steeply and didn’t begin their long, slow recovery until 2013.  It has taken 4 more years to approach pre-crisis levels.  Now, credit unions are beginning to face very different questions than they have since the financial crisis.

Even if your credit union isn’t feeling a liquidity squeeze, now is the time to strategize on the investment portfolio you’ll want to have if loan growth continues to outpace share growth.

Graph showing loans-to-shares for all credit unions in the U.S., 2006-2017

The type of investment portfolio that works well for an institution with 35% of shares in investments will likely be quite different from one that has 10% in investments.  Large investment portfolios often shoulder a hefty profitability burden for the institution.  As loan balances grow, investments may need to serve more of an interest rate mitigation function.  Of course, liquidity needs are also a factor.

Here are some things to keep in mind as you think through the possibilities:

  • If loan growth patterns continue, will the loan portfolio shift toward having more or less interest rate risk?  Will the loan growth cause the yield on loans to increase or decrease?  This can help guide the structuring of investments to balance risk and profitability for the institution as a whole
  • How does the future loan portfolio align with risk limits?  For example, if loan growth is pushing the balance sheet up against interest rate risk limits, can the investment portfolio be used to offset the additional risk?  At the same time, if there isn’t much interest rate risk in the loan portfolio, there might be more room for interest rate risk, and the higher returns that usually accompany it, in the investment portfolio
  • What will be needed for liquidity?  While there are a variety of levers to pull for liquidity, be sure to consider how much of the investment portfolio strategy will be dictated by liquidity needs
  • How might selling investments help to rebalance risk or increase liquidity even if those investments are sold at a loss?  Selling at a loss does not mean the investments were “bad.”  Looking at the total interest earned in comparison to the loss can help provide perspective on how the investment performed for the credit union.  Also factor in what the funds will earn when they are loaned out (and serving members).  Often the loss is a small price to pay to address greater strategic needs
  • Test, test, test!  Test drive your ideas by modeling various future structures in a wide range of interest rate environments

Thinking through what your structure could look like if current trends continue will help lead to better investment decisions today in preparation for tomorrow.  Taking the time to strategize now and form a clearer picture of the future can only enhance the sustainability of your business model.

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Focusing on Branch Profitability, Solely, Misses the Mark: 4 Things to Consider

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As consumers’ preferences continue to evolve, it is becoming painfully clear that focusing solely on branch profitability will provide an incomplete or even misleading picture for decision-makers.

Think of it this way.   Traditional branch profitability analyses often reward branches for living off the past. 

Consider a branch that has a large loan portfolio, creating a lot of revenue, ultimately leading to today’s high ROA for that branch.  However after taking a closer look, it may turn out that this branch hasn’t produced many loans over the past year.  In fact, they are one of the lower ranked branches in terms of loan production.  However, the high ROA shown in a traditional branch profitability analysis is the result of living off loan production from years ago.

Evaluation in terms of current ROA alone may result in missed opportunities to realign resources today in order to have intentional focus on strategic objectives and evolving trends.

The following outlines 4 things to consider that is guaranteed to enhance business intelligence with respect to delivery channel effectiveness.

1.  Expand the evaluation to all delivery channels.  Credit unions are investing heavily in self-service options for members.  Effective adoption of these options is key to remaining relevant for many credit unions.  A focus during on-boarding has proven to help with adoption and engagement of new self-service options

2.  Align measures of success for each delivery channel with the credit union’s strategy.  This requires decision-makers to be intentional about the purpose of each branch, the contact center, and digital delivery channels

3.  Take a holistic approach to metrics.  Rank them to align with the credit union’s strategy.  For example:

  • Membership Growth
    • Not all growth is created equal.  This can be evaluated by segments if there is a strategic emphasis on the type of membership growth
    • Assigning indirect autos to the closest branch can significantly skew results.  Consider evaluating and managing the indirect channel as a stand-alone delivery channel
    • The same holds true for membership acquired digitally.  If a branch is credited, decision-makers will not have clarity with respect to the effectiveness of their digital delivery strategy or the physical branch
  • Value-Add vs. Routine Transactions
    • Work with your team to distinguish value-add from routine transactions, then rank delivery channels accordingly.  For example, many are revamping branches to remove routine transactions so that value-add and complex transactions can be effectively and efficiently handled.  In this case, the metric would evolve around reducing routine in-branch transactions and increasing value-add transactions
  • Member Engagement & Feedback
    • Comprehensive delivery channel evaluations should incorporate what the members are saying about their experiences with the different touch-points.  Credit unions are investing heavily in digital delivery.  It is not uncommon to hear that member satisfaction with digital delivery is lower than that provided in branches.  If this is true for your credit union, ask yourself how this can impact member engagement and how the gap in member satisfaction can be narrowed
    • If the credit union has strategic emphasis on particular demographic segments, consider establishing metrics that align with this focus
  • Loan Growth
    • Rank current balance, short-term, intermediate-term, and long-term performance independently.  This addresses a common flaw of profitability studies that can focus too heavily on older loans
    • Rank major segments of lending by balance and recent production.  This provides an early warning if production is falling off
  • Share Growth
    • Consider category evaluations.  Delivery channels that rank high for regular shares or checking may benefit the credit union differently than those with a heavy reliance on money markets or CDs

4.  Weighting Is Key

  • Each of the above can be important to monitor, but not all of them will contribute equally to the credit union’s performance or strategy.  Consider the credit union’s strategic objectives and then use these objectives to help weight the importance of each category.  This intentional view of production and member experience, connected to strategy, creates better business intelligence for decision-makers than a traditional branch profitability analysis

Having a broader understanding of delivery channels in terms of contribution to strategic objectives and the trends exhibited is the first step.  This can then be combined with profitability estimates if desired.

As the financial services industry becomes more complex, it is important for decision-makers to have the right type of business intelligence so they can take action and make necessary course corrections, timely.