San Antonio Federal Credit Union (SACU) began in 1935 as a credit union for Federal Employees Local No. 28. In its first year it made 37 loans, yielding a profit of $42.84. After World War II it became the 12th largest financial institution in San Antonio and in the 1970s became the 4th largest credit union in the United States. Currently, it has $2.7 billion in assets and serves more than 248,000 members.
As a credit union manager, what is mainly on your mind now?
SH: We need to be careful about how effort and result are related. There is a slow feedback in our industry. The results we are seeing this year stem from the actions we took last year. The earnings and consequences of the actions we take this year are not going to show up until next year, and the years after. We have to be patient to see the results of what we do. The next 12 months are really not going to tell the whole story of how we are doing. It is going to take longer than that to find out if we are moving in the right direction.
In general, I think we in this industry do not look far enough out; we think and act too much for the short term.
What is going on now?
SH: There are some fundamental shifts going on in the national economy. Let’s look at extension of credit. Over the last decade let’s say that about 90% of the people who wanted credit got it. So the flow rate of credit to the population was built to a certain size. If now we are saying that about half those people are not worth our extending credit – owing to higher credit standards or the credit cycle – then there is massive oversupply of credit. The structure of extending credit remains, but only half the loans are going to be made.
Some lenders are going to drop out of the market – some of the specialty ones already have – but you still have an oversupply. This sets the stage for competition in which the low-cost provider is going to come out the winner.
Here’s another way to look at it. Recently institutions moved their money to safety and liquidity, that is, to cash. But cash does not earn money, so they have to lend out their cash or severely constrict the size of their institutions. So if you are not an effective lender today you are really going to be challenged in this low-rate environment. If you are an effective lender, you are still going to be challenged by others out there with an oversupply of lenders relative to the smaller pool of credit-worthy individuals seeking loans.
Efficiency and effectiveness are going to become very critical over the next several years as we reduce the excess supply in the system. This will be true of banks as well. The big unwieldy ones will have to become more efficient or break up into efficient units.
Is SACU cash heavy?
SH: We are growing deposits because our dividend rates are healthy. Attracting deposits has not been a problem for us. But we are also 130% loaned out; we put the money back out to our membership, and this is what we are going to continue to do. We are going to stick to our core business, but we know we will have to do it better. We want to help people get mortgages but we also have to watch our interest rate risk.
What are the opportunities available in this environment?
SH: The dislocation of the markets creates great opportunity to make inroads in lending. But keep in mind the oversupply of lenders. You have to know what you are doing. If lending in a particular market is your core activity, then fine. If not, then you really have to plan carefully when entering new markets.
What is your prediction of interest rates?
SH: I think the Fed in the short term is going to do everything it can to keep rates low. I think the Fed is going to try to massively stimulate housing finance. To the degree the Fed can get international investors to accept its bonds, I think the Fed can avoid monetizing the debt.
When the basic storm passes, investors will evaluate their positions relative to Treasury bills. This could be a year or two off, but when it comes, things will get interesting. Unless we get some structural fixes to how we finance homes, the U. S. Treasury is going to be the balance sheet for U. S. housing finance. I don’t think it can raise enough money at current interest rate levels, which is going to mean higher rates. Inflation will depend on the monetizing of the debt, but I think deflation is more the worry now, particularly because of aging demographics that counter the effects of loose monetary policy due to their desire to reduce their roles as consumers. Deleveraging is contracting the money supply right now.
What is your prediction for the economy?
SH: Despite the federal stimulus package, consumers are going to buckle down because they have lost the wealth effect of their homes and retirement accounts. They are seeing the advantage again of saving, so I think we are going to see the personal saving’s rate grow.
What are the opportunities for CUs?
SH: Think of the 50% of people now being denied credit. This is where credit union opportunities lie. Extending credit when others were not is where credit unions began. So now is a really good time for renewing the core business that brought credit unions into being. That is going to force us to take a hard look at ourselves, because we have lost our way a little bit, too. But I think there is a big opportunity in providing the basic needs of life – housing, education, financing one’s ability to go to work, retirement savings – these are all large opportunities.
How should credit unions take advantage of their opportunities?
SH: They should work at developing their underwriting skills. The backstop of rising collateral has disappeared, and so credit unions are going to have to lend much more on character. Our computer models are not equipped to make these kinds of decisions, so the skill of human judgment is going to have to come back. We have been using linear models but the world has turned nonlinear. Institutions that will do well will be the ones using human judgment well.
When the collateral is no longer relevant, then character is the most important. The fundamental assumption was that the collateral would not go down, but it did. Our biggest assumption for the models was wrong!
Where should credit unions put their money?
SH: Put it in your franchise. We are a credit union, not a savings union. Lend it out. Use it for member needs. If your members don’t need credit but save with you, you are really just a kind of mutual fund. If what your members want is savings, you don’t have much to offer other than safety.