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Preparing For Strategic Planning

As you prepare for strategic planning with your credit union, consider carving out time to go through a structured strategic thinking process.  There are many scenarios to test drive.  Test driving helps you rehearse tomorrow today.  The objective of a structured strategic thinking process is to expand thinking and imagination – not necessarily to make decisions during this process.  Following is just one example scenario many credit unions are test driving.  We have listed a few questions to consider.

Test Drive: It’s 2017 and it is clear that most consumers prefer minimal verbal communication when addressing their banking needs.

Questions:

  • What would be the credit union’s measures of success in this future?
  • What would be the credit union’s value proposition in this future?
  • How has limited verbal interaction impacted the credit union’s ability to create member loyalty?
  • How is the credit union effectively cross selling in this future?
  • How is the credit union acquiring new members from its target market in this future?
  • What is the role of physical locations in this future?
  • How has it changed recruiting, training and retention of employees, management and board?
  • How is the competition taking advantage of this strategy?
  • What verbal communication was considered “sacred cow” and left untouched?
Keep in mind the more you delve into the questions, the more questions you may have.  That’s expected!
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When Will Loan Demand Pick Up?

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This is the question at the forefront of many people’s minds—particularly as loan balances continue to decline and deposit costs move closer to their floor.  It’s a great question but impossible to answer with certainty.  Since our crystal ball is as cloudy as the next, perhaps a better way to approach the question is to ask it a little differently:  What will it take for loan demand to pick up?

Think back to 2004 and 2005.  What was the economy like?  Where were interest rates, GDP and consumer sentiment?  What was the inflation rate, unemployment rate and personal saving rate?  Finally, what was driving loan growth and the economy during this period?

The housing market was a major driver during this time period.  Unemployment was low, personal saving was negligible (even negative), credit was free flowing and housing construction was rising, all while housing values were rapidly increasing.  Now, let’s consider the housing market today using the graphic below (2010: Housing Recuperates, Celia Chen, Sr. Director, Moody’s Analytics).

Source: Fiserv, FHFA, Moody’s Economy.com

While some areas are in the midst of regaining their value, many others are not and likely won’t be for a long time to come.  As a result, housing may not be the driver of loan growth it once was and could remain a drag on loan growth as consumers continue to deal with the aftermath of the housing bubble.  So we circle back to the question:  What will it take for loan demand to pick up?

This question is a great scenario test drive for management teams to answer together.  The small piece discussed here is just one of the many aspects to consider when discussing this question.  Furthermore, answers to this question will vary depending on your credit union’s community and structure.

However, the objective of this discussion is not just to answer the question.  Rather, it is to consider the implications of the answers with regard to your current strategic objectives and even your tactical, day-to-day decisions.  You may find your direction and outlook to be inadequate in light of the discussions you are having.  If so, now is the time to address those inadequacies and position your institution to be successful in the future.

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Good News! NCUSIF Premium Is ONLY 0.2582% For 2010

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The NCUSIF premium was set by the NCUA Board as 0.1242% on September 16, 2010.  This brings the total NCUSIF refunding cost for 2010 to 0.2582% when the 0.1340% for corporate stabilization is included.  This is in the middle of the 15 to 40 basis point (bps) range originally projected by the NCUA in November 2009.  Before you pass out party favors at your next board meeting, however, consider some of the comments made by the NCUA upon releasing this information:

  • CAMEL 4 and 5 federally insured credit unions (FICUs) increased to 366 from 291 in June 2009 for an increase of 25%.  Total assets for these credit unions increased $20 billion or 74%.  This indicates some larger credit unions have entered this group¹
  • The combined 0.2582% premium will cost FICUs $1.9 billion or 2.3% of their net worth²
  • “…NCUA is stepping up enforcement actions – to control the costs of troubled credit unions before those charges must be passed on to all credit unions³

Considering these comments and the state of the economy, it isn’t time to have a party just yet.  In fact it is even more important now to consider various possible scenarios as you work on your 2011 budget and longer-term financial plans.  Those of you who are regular readers of this blog (we thank you) know we are great proponents of scenario testing.  This has not changed—the use of 26 bps of insured shares would be a prudent base forecast; we also suggest that you consider scenarios at both ends of NCUA’s 15 to 40 bps projection for NCUSIF refinancing costs.  In addition to identifying the potential impact on your earnings, this will help you begin to think about possible contingency plans if the higher end of the range comes to pass.

¹NCUA Board Meeting Minutes 09/16/10

²IBID

³NCUA Chairman Debbie Matz Statement, Share Insurance Fund Premium, 09/16/10

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Establishing Concentration Limits

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Establishing concentration limits that enable you to make sustainable, sound business decisions while trying to satisfy new regulatory pressure is very tricky.

The supervisory letter on concentration risk states that examples of concentrations within an asset class include…

“Residential Real Estate Loans—collateral type, lien position, geographic area, non-traditional terms (such as interest-only, payment option, or balloon payment), fixed or variable interest rates, low or reduced underwriting documentation, and loan-to-value (LTV).”

If you are contemplating multifactor concentration limits as described above, consider the following example and how this approach could impact your strategy and business decisions.

Let’s assume:

8 real estate types, with
4 different LTV ranges for
20 ZIP codes (geographic areas) and
6 credit score ranges, would result in

3,840 total risk limits for the Residential Real Estate Loans

Keep in mind the above example is just for Residential Real Estate.  Imagine applying the same multifactor approach to other asset categories.  The number of limits can become daunting and unmanageable.

We recommend listing every limit on a single piece of paper to help decision makers understand the magnitude of their potential policy commitments.

Slicing and dicing portfolios absolutely is a key component of portfolio analysis and risk management.  However, we are concerned that the establishment of these limits in policy is being rushed in anticipation of the next exam or, during the exam process, examiners are pressuring credit unions to establish concentration limits quickly.

Rushing to establish concentration limits without appropriate analysis, including potential impact to strategy and business model, could result in unintended consequences with serious implications.  Not to mention the red flag noted in the supervisory letter regarding changing concentration limits if a credit union is outside of policy.

We highly recommend following a deliberate process to establish limits.  Test drive your limits under various economic scenarios to understand, in advance, how they will impact strategy and business decisions.  This includes the changes that may be necessary to the credit union’s business model in order to manage within the new limits.

This blog addresses only a sliver of the issues regarding concentration limits.  There certainly will be more to follow, such as the correlation between the speed with which concentration increases and poor financial performance.