CFO Challenges: Excess Capital, Tight Margins, and Finding Growth
LANSING, Mich. -- Keeping a watchful eye on the bottom line is one of the many critical duties for which a credit union CFO is responsible, but as of late, knowing how to navigate around an inverted yield curve and deal with "razor thin" spreads have made it that more complex in a fiercely competitive marketplace.
For starters, one of the bigger issues is the prudent and efficient use of capital, which nearly all credit unions have to deal with right now, said Brian McVeigh, senior vice president and CFO at $780 million NuUnion Credit Union.
"The question becomes how do we use it to enhance it for members," said McVeigh, who is also chairman of CUNA CFO Council's Executive Committee. "Traditionally, capital has been used to supplement growth. Part of what has happened is we've focused on solid earnings. Lately, growth has been thrown off a bit. When you grow fast, you need capital to be sufficient and adequate."
McVeigh said in Michigan, where NuUnion is based, the state's economy has taken a beating with record job losses due to automaker layoffs. Members are hurting financially and it has made the credit union, along with other financial institutions, compete more aggressively with each other. Luckily, a community charter switch a few years ago has helped NuUnion reach out to a broader demographic as it continues to work on expanding current relationships, he added.
"Our balance sheets are in great shape. Earning capacities are down a bit, which is probably not a bad thing because it might be okay to let the ROA drop," McVeigh said. "When NCUA issued a letter in August talking about CAMEL standards for ROA, that opened the door to greater innovation on how we can use excess capital. There's the presumption that we're not going to be satisfied unless you have 1% ROA. NCUA clarified that each credit union should have its own customized plan."
McVeigh said he's surprised that CUs are not taking advantage of wholesale borrowing like small banks do. The stigma is that some CUs might think if they borrow from other financial institutions, then there might be the perception that the CU isn't doing a good job managing their own portfolios.
"Wholesale borrowing would provide more fuel to upgrade services and products and in turn, attract more members," McVeigh said. Member Focus
Meanwhile, for some CFOs, membership retention and growth sets the foundation for everything else including core deposits, future lending activities and overall strong financial performance, said Erin Mendez, senior vice president, finance and technology at $6.6 billion Orange County Teachers Federal Credit Union.
"A new member brings in core deposits, which, quite frankly, are cheap--checking accounts or share accounts," Mendez said. "Eventually, they bring in CDs or loans but core deposits are normally set to help fund pricing for loans."
The catch is if there are no members coming through the doors, CUs have to look at how existing members are treating their core deposits, Mendez said. At Orange County, the focus has shifted to return to members and offering good value coupled with strict management of expenses, she pointed out.
"When other credit unions have pressures on margins, they still have to get revenue from other sources. In our case, we try to keep our fees very low," Mendez said. "We have a razor-sharp focus on school employees and our prices are priced uniquely for them."
Indeed, Orange County is among those CUs that have stuck close to its original sponsor, but a couple of years ago it expanded to a trade, industry and profession charter to serve the entire educational field. Mendez said they prefer it this way rather than getting "distracted in spreading ourselves to other groups."
Another pressing issue for many CFOs to consider is financial risk, Mendez said, adding it is often influenced by current economic conditions. For instance, subprime borrowers were all the rage roughly three years ago, but now many are defunct because of credit issues, she explained. Alternative mortgage options, which can include hybrid adjustable rate mortgages and interest-only loans, have become popular over the past year or so. Mendez said while members have asked for these loans, the CU has made a prudent choice not to offer them.
"Traditionally, credit unions are not subprime lenders, we're certainly not," Mendez said. "Alternative mortgages are highly problematic for people who are already stretched. We have stayed away from risky products because we try to protect our members and it aligns with our values."
Last year's liquidity crunch may lessen this year as some economists are predicting, Mendez said, adding liquidity tends to ebb and flow anyway.
While liquidity management continues to be an issue for most CUs, managing net interest margins is just as urgent, said Jay Scungio, vice president of finance and CFO at $316 million Freedom Credit Union in Springfield, Mass. The yield curve has also made the equation difficult because of resulting razor thin spreads.
"For our credit union, 2007 will be the first year that the net interest margin was not enough to cover operational expenses," Scungio said. "My cohorts [at other CUs] might say 'we've been like this for five or ten years' but it still puts more pressure on running as mean and lean as you can."
Scungio said he's also concerned that some are putting all their eggs in the fee income basket. An investment or insurance CUSO is a good source of fee income, but the important consideration is it has to be "value-added," he explained. Courtesy pay, from many members' perspective fits the bill, but Freedom CU is going a step further by offering financial counseling.
"We're going to be sending out information letting the members know we offer financial counseling because there's a fine line between value-added and taking advantage of people and we don't want to do that," Scungio said.
Freedom is also looking at commercial lending because the weighted average yield is typically higher than residential or consumer loans, Scungio said, adding it always helps to be able to offer a wide array of products and services especially in Springfield where there are 15 Bank of America branches and CUs clustered in a single area.
"We're fighting over the same people. You need to be in the game," Scungio said. "My philosophy is like Wal-Mart's--you put out as much as you can on the table and let the members use it. If you're not offering it and a member has made up their mind that they want it, they're going to go somewhere else. We've had to turn away a few people because we didn't offer certain loans."
To stay ahead of the competition, Scungio said CUs should be doing what's best for its members and not necessarily operating to please the regulators.
"You have to be quick on your feet. You don't need big brother looking over your shoulder. It's a balancing act," he offered. In the meantime, "we're waiting for the yield curve to go back to its normal shape and that will help create a little bit more margin." Expense vs. Service
Striking a balancing act between ensuring that members have convenient access to branches and good employees are retained through above-market salaries almost always impact controlling operational expenses, said Pam Finch, vice president of administration and CFO at $175 million Mid Minnesota Federal Credit Union.
"The biggest expense for us has been employees but if you cut what you pay them, you're not going to get good service," Finch said. "We're a community charter and our members are high transaction members. Members are getting smarter and credit unions are starting to learn how to negotiate with them to keep their funds."
As with most other CUs, fee income, managing growth and attracting new core deposits continue to dominate, Finch said. Mid Minnesota prides itself on "not feeing our members just to fee them." Instead, the CU relies more on basing fees on what service a member decides to pursue rather than imposing charges on them.
"It doesn't leave a whole lot of room for fee income but how do you increase it without sticking it to the members," Finch said. "There are only so many things you can control on the income statement. You have to be creative without it being detrimental to the member."
A CU's board can sometimes stonewall that creativity. Sometimes there may be members who have been on the board for more than 20 years and are a little hesitant about adding more products and services. Finch said, "strategic visioning," with all its time and energy, can help the CU steer in the right direction, but there may still be challenges.
"There's a lot that's been expected of the board as well as the supervisory committee," Finch said. "When you work with a volunteer board, sometimes you get a passion [from them] for understanding the business and how it works and sometimes you don't. You have to help them understand how you're balancing strategic decisions on a weekly and daily basis."
Of the myriad of issues CFOs contend with on a day-to-day basis, it's clear that there's not one that takes priority over another. Finch said it's a cycle of balancing acts.
"To make choices to grow, you have to spend money and sometimes NCUA might not want you to do that," she said. "There are Internet banks that can get 4.5% for your dollars and a member can easily move all his accounts over at 3:00 in the morning. We won't be able to compete and we're not going to be able to pay higher premiums if we stay where we are." --firstname.lastname@example.org