The term “small credit unions” is relative. That said, even when times are good, the “small credit union” tends to face challenges in a way that “larger credit unions”, another relative term, do not.
Speaking from experience, the pressures on the small credit union leadership looms large on a daily basis. The leadership must be intimately involved in all aspects of the operations. Regulatory burdens alone loom large for the small credit union. Small credit unions have a more intimate relationship with their members. These smaller institutions are under a higher degree of pressure as they assist their members.
Asset quality in small credit union has not changed over the past several years. The net worth ratio remains robust. Navigating the economic uncertainty can be difficult. Negative trends catch the eye of examiners, boards and management.
There are no quick answers here. With that said, however there are common themes which are helpful regardless of asset size.
- Place negative trends in context. Make sure interested parties know how other credit unions are faring. Information will help directors and management make informed decisions and transparency reduces the likelihood of knee-jerk overreactions.
- Most small credit unions have plenty of capital. Avoid penalizing members with higher loan rates. higher fees, lower dividend rates, service reductions and layoffs just to maintain net income. Analyze the impact of those decisions.
- Rising delinquency and loan losses require close monitoring and active collections. Don’t simply tighten underwriting standards. Revisit loan quality parameters. Analyze the remaining inherent risk in the loan portfolio. Score the loan portfolio and analyze the scoring migration.
- Mortgage defaults are on the rise. One mortgage delinquency in a small credit union can have a large impact. Develop a mortgage modification policy and guidelines to assist the membership during economic downturns.
- Avoid big strategic initiatives in uncertain times.
- Loan demand falls during economic downturns. Reliance on investments takes center stage. Investments yields are low so be conservative when placing investments. Be SLY (safety, liquidity and yield.) Build a basic ladder.
- Since market conditions are volatile, asset liability management becomes more important. Set policy parameters on fixed rate mortgages. The Federal Reserve is out of policy options on the short end of the yield curve. The Fed through quantitative easing is forcing mortgage rates down to historic lows. Market rates will rise at some point. Credit unions with large portfolios of long-term fixed rate (rate insensitive) assets will pay a high price (compressed NIM) in a rising rate environment.
- Engagement with third-party vendors requires additional caution during uncertain economic times. Have a robust vendor due diligence program and policy in place.
- Stress to members and potential members that your deposits are federally insured.
- Reduce to writing your plans and be able to communicate your credit union’s tolerance for risk. The regulators will expect the leadership has considered where the credit union is financially headed and there is a road map containing a reasonable achievable plan.
During times of financial dislocation, credit unions, regardless of asset size, can show others the benefits of the cooperative movement.
Edward Lis is vice president of finance at Fulton County Federal Credit Union in Gloversville, N.Y.