A Delicate Balancing Act

CUs must meet members’ needs while maintaining sound financial practices.

March 14, 2011

The old curse, “May you live in interesting times,” came to mind as I read a recent issue of the Raymond James Economic Research report. Among other things, it states:

  • “The good news is that the economic recovery is expected to continue in 2011, as positive momentum in consumer spending and business fixed investment battles continued headwinds.
  • The bad news is that the recovery is unlikely to be strong enough to push the unemployment rate down significantly.
  • The risks to growth are still tilted predominately to the downside, but monetary policy will remain supportive.”

“Interesting times” indeed. Credit unions continue a delicate balancing act between meeting members’ individual needs and maintaining sound financial practices for members.

Credit unions rely on member con­fidence and willingness to borrow. But times are tough. Low inter­est rates and soft loan demand plague net interest margins. The regulatory environment threatens noninterest income, and operating expenses continue to increase. The 2011 NCUA assessments are simply icing on the cake. 

Our members remain cautious—believing the economic recovery they’re hearing about is mostly on Wall Street, not Main Street. 

To maintain balance amid these challenges, my credit union has:

  • Taken a conservative approach to its budget, and then set goals higher than budget outcomes. The intent: to stretch performance and ensure optimal earnings for members.
  • Created three task forces to examine core earnings sources: net interest income, noninterest income, and operating expenses. The task forces’ mandate was to improve 2011 budgeted return on assets by 25 basis points.

We put aside past practices and assumptions to conduct the evaluation. We assessed risk/reward trade­offs with a determination to improve return on assets ­without mortgaging our future. We sought structural change, rather than a few quick fixes. And we never lost sight of our mission, the credit union philosophy, or our obligation to our members.

Your credit union probably will weigh risk/reward considerations differently depending on its budget. But here are key issues we found useful:

  • Evaluate the concentration of real estate assets in your overall portfolio. If your mortgage portfolio has diminished, you could augment yield by adding mortgage-backed securities.
  • Review your investment portfo­lio’s duration. Based on overall dura­tion and the loan-to-asset ratio, consider investing in longer maturities. Model the impact on interest-rate risk to determine how far you’re willing to extend.
  • Avoid diluting long-term value if you reduce share interest rates. Balance the immediate improvement in net interest income with the possibility of increased withdrawals, which could put your credit union’s future funding ability at risk.
  • Modernize checking account programs to include current trends in electronic services and opt-in options. Re-evaluate “free” checking.
  • Assess third-party contracts to make sure you’re maximizing commissions on insurance products and other third-party income.
  • Re-examine your fee schedule and update it, if necessary.
  • Reallocate staff. If business volumes have shifted, consider moving personnel from lower-volume teams to higher-volume teams, reducing the need for layoffs and new hires.
  • Evaluate employee benefits, such as health-care co-pays. Re-evaluate your health insurance provider.
  • Convert members to online electron­ic services, such as e-statements and Web transactions. Offer incentives to save money near term and long term.
  • Consider self-insuring for plastic losses. Assess how well the credit union manages these losses, and the effectiveness of its mitigation systems.
  • Determine the usefulness of a wireless ATM network connection, based on the number of ATMs.

Business conditions likely will remain challenging this year. The econ­omy is improving, but unemployment remains high and interest rates stand at historic lows. In these interesting times, we must work hard to maintain fiscal balance and con­tinue to grow.

ERIN MENDEZ is executive vice president/chief operating officer of SchoolsFirst FCU, Santa Ana, Calif., and chair of the CUNA Council Forum. Contact her at 714-466-8109. For more information about CUNA Councils, visit