As credit unions budget for 2011, many financial managers are searching for revenue sources, as traditional money makers like consumer loans and investments still aren't performing to historical norms. Business services and innovation may be the answer.
Terry Halleck, preparing her first budget as president/CEO of the $5 billion San Diego County Credit Union, said she's making a number of adjustments for 2011, including "realistic loan-volume projections" and the identification of niche loan products and related opportunities.
California's housing market is still relatively weak overall, she said, and home purchases, home equity lending and refinancing aren't expected to rebound in 2011. Auto loans could be a source of revenue, but competition is fierce because there are fewer qualified buyers.
Additionally, SDCCU is carefully monitoring loan delinquency and loan-loss trends to ensure adequate loan-loss allowances.
"We are fortunate that we also have a business services offering and related in-house expertise that provides additional opportunity in our select markets," she said.
Michael Castellana, president/CEO of the $2.1 billion State Employees FCU in Albany, N.Y., said his credit union budget is being squeezed by low investment returns, assessment costs and government limits on fee income. However, SEFCU's members have more demand for business loans than the credit union's appetite, and he's looking for loan participation partners.
"So many traditional players have abandoned the space," he said, "that on the commercial side, $10 million and under is an underserved market."
Business services in general are in high demand, he said, from micro enterprise loans to commercial real estate deals up to $30 million. Demand is so high that the credit union has tightened underwriting and still has plenty of qualified borrowers. Albany didn't experience the high real estate property value increases some other areas did, he said, so it also didn't experience much of a crash.
Castellana spoke with Credit Union Times from Radio City Music Hall in New York City, where he and his senior management team were attending the 2010 World Business Forum. Hoping to be inspired by global trends and innovative ideas, the group is attending presentations by prestigious speakers such as former vice president Al Gore, Freakonomics author Steve Levitt, filmmaker James Cameron, former GE Chairman/CEO Jack Welch and former White House adviser David Gergen.
"I don't believe there is a magic silver bullet, so our solution is to innovate and create value and increase relevancy to our membership and to our community," he said. "And, we'll try to do that in such a size and scope that we can increase income incrementally, in small pieces, and in nontraditional ways."
SEFCU just acquired a mortgage bank so it can offer mortgages to nonmembers, and is expanding its wholly owned insurance agency.
"It's a focus on innovation to make sure we aren't trying to just reshuffle the deck and find the flavor of the day, but rather find a systemic solution to what I think will be a very long-term income challenge," he said. Hopefully, one or two ideas today will resonate with us and we can turn them into actionable business plan initiatives."
Chuck Cockburn, president of the Sumner, Wash.-based Credit Union Strategic Planning, said his firm is recommending that credit unions look to business loans and services to provide income in 2011. Credit union members are demanding these services as banks continue to focus on big business, he said, even though small businesses are where economic and employment growth is currently found.
As the former president/CEO of Seattle's $500 million Watermark Credit Union, Cockburn said he's specifically recommending micro business loans, granted to companies with five or fewer employees, with an average loan size of $8,000. Loan types vary from simple lines of credit to closed end equipment purchases.
"Just like any other loan, the key to success is underwriting and pricing to cover risk," he said. Smaller credit unions can outsource underwriting to a CUSO or a larger credit union with experience.
One of the keys to successful business services is providing more than just loans, he said.
"Just like any member, the more services they use, the more profitable the relationship will be," he said. "Credit unions that provide business services will find those members will be the most profitable."
Jamie Chase, principal at Credit Union Strategic Services, added that the firm is also having success in helping credit union clients win grants that can be put toward loan loss reserves and new product and service feasibility studies.
"The government wants to see an increase in business loans; it's in line with the current Congressional agenda," she said. Some CDCI grants she's helped secure over the past few years were granted specifically for loan loss reserves, so credit unions can safely and soundly offer new in-demand products like business loans and services.
On the expenses side of the income statement, operational budgets continue to be squeezed, and credit unions will continue to pay out low dividend rates, Cockburn said.
Historical board pressures to keep dividends high are fading, because volunteers understand they must counterbalance slow growth and other negative income pressures.
"Besides, most of the time all you do is lose the rate chasers," he added.
Halleck said she is budgeting for "prudent deposit pricing projections" that recognize the potential for negative earnings if deposit growth exceeds reinvestment opportunity yields.
Not all credit union CEOs are scratching their heads looking for revenue. Monroe County Teachers FCU's Gerald Bolduc said his Key West, Fla.-based credit union is exceeding its goals for auto lending and is "making money." According to the $9.7 million credit union's June 5300 report posted on the NCUA's website, Monroe County Teachers reported a 1.12% ROA, far exceeding the peer group average of negative 0.30%.
The key is a lack of competition in the marketplace, Bolduc said. "None of the local banks in the area make auto loans, and the only other credit union that used to is currently in conservatorship.
"We have clear sailing ahead," he said. "We pay the best rates to get money in, and the best rates to get that money back out."