Managing Your Crop of Loans

Position your CU to withstand increased dividend costs when rates rise.

November 1, 2010

My entire life I’ve lived in areas that depend on agriculture to provide a living for a large portion of the population. Florida relies on citrus, cattle, and snowbirds. In South Carolina, it’s corn, soybeans, cotton, and snowbirds. Wisconsin, arguably the greenest place I’ve ever lived (except when it’s white), counts on corn, cranberries, and dairy products. Up here, we export snowbirds.


I have a deep respect for the hard-working people in agriculture and for my dependence on them. I also have a keen respect for how they manage their assets. Their working assets consist primarily of land, equipment, livestock, and working cash. The decisions they make year to year and day to day determine whether they’ll succeed or lose the farm, literally.


What they choose to plant each year will determine success or failure. Will prices of corn and soybeans be high or low? Will it be a dry, normal, or very wet year? Once they make their choices, they’re committed for the year. 


Farmers actively manage their livestock. They monitor the productivity of each animal—often through sophisticated technology—and weed out the poor producers. 


A modern farmer’s operation is analogous in many ways to managing a credit union. Loan programs that result in big losses, branch locations that don’t succeed, and promotions that go “thud” are credit unions’ failing or poor crops.  


Loanscredit unions’ largest asset by farhave a gross return based on interest rate plus any fees from credit insurance. The costs are losses on loans, the cost of funds, and ongoing costs of records and compliance. While operating expenses are relatively fixed, the largest cost—the cost of funds—is variable, depending on the prevailing market rates. This is true because shares reprice often, reflecting market changes. Because rates are so low right now, the only direction for rates to go is up.


Of the 7,600 credit unions in the country at the end of June, 4,501 have fixed-rate mortgages that represent 20.7% of their total assets. In 912 of these credit unions, fixed-rate mortgages represent more than 25% of assets. In 386, they represent more than 33% of assets.


As history repeats itself, there’s no doubt that rates paid for deposits will go up. Fortunately, CUNA economists believe any increases will be minor in the next few years. But the fact remains, this large block of credit union assets will experience a rising cost of funds and thus become less profitable, perhaps much less profitable.


Historically, mortgage portfolios reprice when borrowers refinance. Well, consumers already did that to get today’s extremely low rates. They won’t refinance as much in a rising interest-rate environment.   So consider:

  • Selling new mortgages on the secon­dary market rather than booking them. 
  • Making your overall loan portfolio more consumer loan-based by marketing your consumer loan products to current mortgage holders. You already determined they were a good credit risk when you made their mortgages, so why not get their auto, credit card, and other financing as well?
  • Working hard to get a bigger piece of other borrowers’ total consumer debt by applying the same techniques and “stealing” balances from other lenders at the time loan applications are underwritten.

This isn’t a quick fix; there aren’t any. But in the time left before rates move back up you can materially improve the situation and put your credit union in a better position to withstand the increased dividend costs.

Successful farmers are experts at surviving bad weather, low prices, and even bad decisions. But they always seem to learn from each setback and improve their odds for long-term success. We can all learn a lot from that.

JOHN FRANKLIN is executive vice president and chief operating officer for the Credit Union National Association in Madison, Wis. Contact him at 608-231-4266 or at