Credit Union Magazine - January 2009 - (Page 48)

TRENDLINES There’s no silver bullet for the current economic turmoil. Tough Times For (Small) CUs Mike Schenk Even in good times, small credit unions face unique challenges. Today’s economic mess is causing big financial and operational problems for many credit unions, but particularly for the smallest ones. National Credit Union Administration data show U.S. credit unions with less than $35 million in assets had only 0.42% return on assets (ROA) in 2008 (year-to-date annualized). That’s down from 0.61% in 2007. Perhaps more disturbing, 23% of small credit unions were “unprofitable” (with negative ROA), compared with 14% in 2007. But while many continue to find growth elusive, more small credit unions are growing. More than two-thirds of small credit unions recorded asset growth during the 12 months ended September 2008, compared with only about half in 2007. Their 5.6% 12-month asset increase was the strongest since 2003—boosted by members’ flight to safety and increased balances in short-term, liquid, rainy-day funds. Small credit unions’ asset quality is little changed. Both delinquencies and net charge-offs remained stable during the past five years. Small credit unions’ 14.2% average net worth ratio remains near the alltime high of 14.6% at the end of 2007. And 98.2% of them have net worth of 7% or more. Nevertheless, navigating today’s treacherous economic waters is difficult. Negative trends get the attention of credit union boards and senior management. A natural response: Jump to action. But 48 CREDIT UNION MAGAZINE is that the best course? As financial results face increasing pressure, how should small credit union boards react? The Credit Union National Association’s (CUNA) Small Credit Union Committee recently tackled these questions. Committee members agree there’s no silver bullet. Appropriate actions will be as varied as small credit union operations. Some common themes: u Provide context. Ensure directors know how other credit unions are faring. Knowing others face challenges (and knowing the magnitude of those challenges) will help directors make more informed decisions, reducing overreaction. To access small credit union operating results, visit cuna.org and select “small credit union resources” under “CUNA initiatives.” u Avoid penalizing members with higher loan rates, more and higher fees, lower dividend rates, service cutbacks, or layoffs just to keep net income from falling for a year or two. Most small credit unions have more than adequate capital. u Avoid drastic underwriting changes, if possible. Rising delinquencies and loan losses require close monitoring and active collections but not necessarily tightened credit standards. Now may be a good time to revisit and recalibrate loan quality uJANUARY 2009 ucuna.org parameters. The best response to declining net income caused by rising loan losses may be to adjust your budget and then carefully let it happen. u Pursue new activities carefully. Don’t swing for the fences to increase or maintain earnings. Avoid big strategic changes during these uncertain times. u Monitor activities with outside, third-party vendors, which often suffer during a down economy. CUNA’s Due Diligence Task Force guidebook contains advice and a sample policy. To access the free resource, visit cuna.org and select “Due Diligence Task Force.” u Tell people about share insurance. Stress that your credit union’s deposits are backed by the full faith and credit of the U.S. government— just like bank deposits. u Document your plans, and communicate your risk tolerance. Tell regulators your credit union’s leaders carefully have considered where the institution is heading financially and have mapped out a reasonable plan to deal with the uncertain future. Most small credit unions can afford to take a long view—letting the capital cushion do its work. Avoid trying to maintain net income in the current environment, which unnecessarily could harm the credit union and its members. Well-positioned market participants often find opportunities during tough financial times. Small credit unions, like larger ones, should publicize the unique and substantial benefits of their cooperative structure. MIKE SCHENK is vice president, econom- ics and statistics, for the Credit Union National Association. Contact him at 608-231-4228 or at mschenk@cuna.com. http://www.cuna.org http://www.cuna.org http://www.cuna.org

Table of Contents Feed for the Digital Edition of Credit Union Magazine - January 2009

Credit Union Magazine - January 2009 Contents On My Way Leading Edge Spotlight President's Perspective Game Plan Washington Insider Wright Stuff Executive Suite Reverse Mortgages Come of Age Six Merger Myths Leading-Edge Lenders TwentyFour/Seven Bankruptcy Compliance Tools of the Trade Trendlines Rates & Ratios Council Corner Shoptalk System Scan Marketplace Branching Out Advertiser Index

Credit Union Magazine - January 2009

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