In the wake of the current economic slowdown and disturbing international affairs, pessimism abounds in the business world. That attitude is spreading among some credit union leaders. As businesses become cautious during this time of turmoil, they tend to reduce capital expenditures, lay off people, and postpone expansions. They prefer to ride out the economic storm before making bold business moves. Unfortunately, they’re missing opportunities by letting the daily bad-news broadcasts cloud their thinking. The truth is that widespread business pessimism brings great opportunities for the well-informed who have a sense of business history. Astute credit unions can profit in these challenging economic times. There’s lots of talk in credit union circles about “big problems,” including: slowing or negative loan growth; soaring savings flows that reduce capital ratios; high expenses, especially in the salaries and benefits area. But are these problems, or are they opportunities? Credit union leaders are understandably concerned about slowing loan demand, the golden goose that generates credit union revenue. Most find it necessary to reduce their loan rates to compete in a shrinking new loan market. Further complicating matters are loan rates of “0%” offered by auto manufacturers. However, existing bank loans provide special business and member service opportunities in this environment. Smart credit union lenders are increasing their efforts to attract old loans members have with other financial institutions. Most of these loans are at rates substantially above current market rates. It’s a relatively easy cross-selling opportunity for credit union employees: “Ms. Member, are you aware how much loan rates have dropped recently? You can save $200, $300 or more by refinancing your bank loan. It only takes 5-10 minutes to save hundreds of dollars, and we do all the work..” The opportunity is enormous, because the majority of members are likely to hold consumer loans from banks and other financial institutions as well as from their credit union. Most members are credit worthy. They love to save money, and a credit union can make it easy for them to save a bundle through refinancing. Many smartly run credit unions will excel at capturing existing loans and generating new ones during this downturn in our economy. The very best will experience net loan growth even as the majority of financial institutions see their loan portfolios decline. It’s a matter of taking advantage of the situation, and reaping the benefits others may not see. During the first half of 2001, member savings grew by over 10% compared to 4% during the first half of 2000. The horrific events of September 11 accelerated member savings. CUNA economists now expect that total credit union savings will grow over 15 % for the full year. Some forecasters expect higher savings growth. Rapid savings growth will reduce capital ratios at most credit unions. Many credit union leaders perceive a drop in capital ratios to be a problem. Their business plans are premised on high levels of capital. They know that their examiner is likely to take a dim view of declining capital ratios. Some credit union leaders may experience psychological pain and suffering from again confronting a single-digit capital level. But is a drop in capital ratio really a big problem? For a very few credit unions, the answer is “yes.” However, most credit unions are more than adequately capitalized. Industry-wide capital ratios reached record levels at the end of 2000. The number of financially distressed credit unions is almost zero, and the insurance fund is healthy. The much bigger financial problem for credit unions is the operating expense ratio (expenses/assets). The great opportunity during this recession is to lower the expense ratio by attracting and retaining additional savings in a prudent manner. To understand this opportunity we first need to realize that expense ratios can be lowered either by (1) cutting expenses, or (2) increasing assets. Most credit unions do a very credible job of controlling expenses, but they are less successful in attracting member deposits. If credit unions could hold operating costs relatively stable and increase deposits per member substantially, their expense ratios would plummet. Filene research clearly shows a powerful inverse relationship between assets per member and operating expense ratios. The current inflow of savings provides a once in a decade opportunity to lower operating expenses through asset growth. First, the funds are coming from existing members rather than new members, thus not triggering cost pressures of membership expansion. Second, the funds are coming in at relatively low interest rates. Third, a significant portion of these funds will remain with the credit union after the recession ends, because (1) many members who are baby boomers are reaching an age where saving in a safe financial harbor is attractive and (2) many members are being reminded that economic slowdowns are possible, and the stock market does not always go up. The potential to grow savings per member is surprisingly good. The great challenge for credit unions is to price savings products properly to achieve desired short- and long-term effects. Rates in general, including regular share account rates, should float downward to a prudent price level: not too high to attract hot money constantly searching for the highest rate, and not too low to scare stickier deposits away. Hiring people Layoffs by other firms provide credit unions with extraordinary opportunities to hire high-potential employees who will bring value to the organization and its members. This opportunity is now particularly evident in the computer and information systems areas. It also exists in fields as diverse as human resource management, marketing, and accounting. A recent Wall Street Journal article (Oct. 2, 2001) reports: “Tough times might be a good time to hire, a study finds. Companies that hired during downturns in their industries saw better stock-market performance two years after recovery, according to a recent study of so-called counter-cyclical hiring.” Charles Greer, associate dean for graduate programs at Texas Christian University and co-author of the study, says that many wise firms hire for hard-to-find skills during these difficult periods. Credit unions are uniquely positioned to hire good people during economic downturns. While concerned about earnings, they do not have the quarterly profit pressures of stock-owned institutions. In summary, economic valleys generate both problems and opportunities for credit unions. While we can’t ignore real problems, we also need to aggressively pursue the emerging opportunities on the business horizon.

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