4 minutes
Many CUs are facing death by a thousand cuts. Amid economic uncertainty, a tough lending environment and prolonged low rates, some executives may have lost their most vital asset—hope. Low rates have forced CUs to rely increasingly on non-interest income, a persistent trend that dates back to 2003, and the low loan demand that owes to the 2008-2009 recession has yet to turn around. The costs of regulatory compliance continue to rise, and the National Credit Union Administration’s current focus on cutting expenses is not only challenging but may represent bad advice. Most CUs have already reduced expenses to the point of adversely affecting service and delivery. Is it any wonder that mergers are seemingly a daily occurrence in our industry?
These trends have combined to create significant obstacles along the road to strong financial performance. How can CUs get around those roadblocks? I recommend charting a path to generate income--focused and intentional income, income with a purpose. To do so requires the right programs, the right staff and the board on board with taking the road less traveled to bolster the bottom line.
Let’s focus on programs that put idle assets to work for higher yields. Many CUs have a huge amount of excess liquidity, some of which should be viewed as available for innovation. The process is to view some portion of these assets already held by the CU as capable of generating income on a scale larger than the standard credit union model generates based on loan and investment yield. A key question is: What can we do with our financial structure, resources, community of members, and operations that will increase income above that of loan and investment yield without the usual associated expenses?
We’re not talking about meeting statutory or policy requirements here, but applying funds to boost income without adding staff.
Examples of using AFI funds for income-intense programs include:
Buying loan participations. These programs can pump up income and financial ratios. They pass NCUA muster without increasing staffing requirements. A single qualified person can buy, book, balance, and oversee a loan participation program in a half-day per month, generating millions of dollars in loans through part of a part-time job. The potential rewards are huge, with high yields and relatively small risk. Properly administered loan participations with effective risk mitigation techniques have little to no credit losses. Buying smart is better than buying fast.
Consider bringing in additional funds specifically to fund AFI activity. Money market accounts are extremely low cost and low maintenance. They are also a great way to generate excess funds and are stable over time. What is the likelihood that the money market cost of funds would exceed what you are earning on a loan participation deal? Loan rates will rise at the same time as any cost of funds, so you wouldn’t be upside down on that match.
Purchasing negotiable instead of direct CDs. When funds are needed, you can these sell negotiable CDs for a gain instead of paying a penalty as you would on a direct CD. In addition, you will receive a statement of account instead of a time-consuming monthly accounting exercise that doesn’t add income.
Examples of using your current structure are:
Managing loan concentration limits. How about selling off part of the portfolio and continuing to make those loans? Seek out brokers who can help you do that easily, for a potentially substantial return. Your CU retains servicing and receives a bump in income as the recipient of a premium on the portfolio interest rate from selling loans as an investment alternative. The CU also retains a percentage of the loan income generated.
Referring turned-down loans for a second look. A new program from LendingPoint offers a second look at a loan and, if those loans are then funded, the CU receives 2 percent of the loan amount without being on the hook if it defaults. This is worth a look. How many times do you think you can tell a member “no” on a loan request before you lose that member? What are you doing with your turn-downs now? Afraid to refer because you think the company may steal your loans? Where do you think your members are going now? If you study their credit reports, you may well find that they are turning to alternative, “fin-tech” lenders. How much income is that driving to your shop?
Implementing options like these provides efficient alternatives to more labor-intensive programs and services. HTM (held to maturity) and AFS (available for sale) are familiar abbreviations in managing assets. Adding AFI to the useful abbreviations in your financial toolbox can help generate income even as tough economic conditions persist.
What part of your credit union’s assets would today qualify as available for innovation? What person is tasked with implementing innovative processes specifically to generate high-income, low-cost solutions for your credit union? The focus here is how you can use the CU’s resources to enable it to better serve its model.
Gregg Stockdale is the founder and principal of GS CU Consulting, where the motto is “We help CUs THRIVE.”
