We are in the low portion of a normal cycle. Previous good planning should carry you through, but some points to remember: Don’t panic; keep diversified; emphasize service over yield; stick to your mission; and maintain strong contact with members
The media has its horror stories and some credit unions made some very bad mistakes, but my 35-plus years of experience tells me: Don’t panic; this is part of a normal cycle. Frankly, I didn’t think some parts of it would be as bad as they have become but really what we are seeing is a predictable long-term ebb and flow. This isn’t the first time housing prices have dropped and it won’t be the last. We are going to get through it. This is what capital is for. Stick to your mission of creating member value and you should come through fine. Remember that there are always going to be good years and bad years – weather the storm. You don’t want to knee-jerk a solid strategy in the low point of a normal business cycle.
Below are a few points about managing through the cycle.
Planning is critical. Of course, you should have been planning in years past for the environment we have now and assuring that you were structuring your balance sheet in order to adjust to just this set of circumstances. The present environment shows the value of scenario planning: Everyone should have thought out what they would do if interest rates dropped and if they rose. If you had done the proper planning, you would have anticipated the current conditions and have in place the means of meeting them.
Always assume there are going to be cycles. When this portion of this cycle arrived, we at PEFCU had already analyzed our balance sheet to see how best we might restructure, if necessary. We didn’t need sophisticated modeling for this, and we didn’t need it when this portion of the cycle arrived – we just looked at our portfolio and determined how the parts of it could best be handled. We call it strategic agility.
Proper planning should help you build up adequate capital to carry you through the down part of a cycle; partly, this is what capital is for and for most of our credit unions we have more than sufficient capital.
Don’t concentrate, diversify. Don’t have your working assets overly weighted in one type. A solid mix of mortgages, credit card loans and auto loans will provide a portfolio balanced by return and duration. Diversification goes beyond just loans – you wouldn’t want to be heavily weighted in mortgages and also a concentration in investments backed by mortgages as well. Just remember to stay diversified
Focus on Your Mission
The institutions that have fallen into trouble seem to have been the ones that strayed into vehicles they did not regularly deal with and thus probably did not properly understand. The old adage that “if it’s too good to be true – then it really isn’t” holds today. Stay with what you know.
Focus on serving your members. Place service ahead of searching for high yields. Let your capital take you through the low points in a business cycle. Stay in the loan business – your members need you most at times like this. Again: Service is more important than yield. Focus on credit risk. We sometimes get hung up on interest rate risk and indeed we should pay close attention. At PEFCU, however, we operate on the theory that interest rate risk can make a credit union sick but credit risk can be fatal.
Don’t go chasing odd lending instruments. Over the past few years we used a mix of ARMs and 30-year-fixed. For the ARMs we qualify members based on the full exposure, not the initial rate. This, plus the fact that Indiana saw neither the run up in home prices nor the subsequent rapid decline, has given us a solid and well collateralized portfolio. Avoid lending more than 80% and use solid credit criteria. If you stick to that, you can handle a property value decline of 10% to 15% without taking major losses.
Take Advantage of the Cycle
Look at your mix of assets. What could you sell today at a profit that may not be a profit later on? Determine what kinds of loans you can afford to hold during this part of the cycle and how this affects what you could reasonably sell.
Hold onto the Contact Point
When we sell mortgages, we retain the servicing, and we consider doing so very important. Selling mortgages allows us to make more loans, bringing in new members. But we retain the servicing for all the mortgages because we do not want to lose the contact point with members. Maintaining these contact points allows us to deepen the relationship with our members through cross sales of other products.
If You Have Had Trouble
If you’re having trouble, it’s worth saying again: Don’t panic. This is why you have capital.
But go back and see what red lights were overlooked; do a postmortem on where your planning failed. Find out what you missed.. Keep your board “strategically” informed and adjust your business strategy to take advantage of the cycle you are in. Remember that changing a CEO will accomplish little or nothing; if the policies don’t change or the strategy isn’t adjusted then a new CEO is merely going to run the same route as the old CEO.