Top 10 Planning Topics
Even though a slow recovery is underway, your CU’s strategic planning team will face another challenging year.
Many economic indicators are pointing in the direction of a slow recovery. While credit unions will continue to experience fallout from the worst economic downturn in a generation, there’s a growing sense that we’re starting to see daylight, according to CUNA’s just-released 2011-2012 Credit Union Environmental Scan.
Earnings are crawling back to respectability. Lending is coming out of its coma, albeit with wobbly legs. You shouldn’t have to pour a lot of additional funds into your allowance for loan loss account this year. You still have the interchange issue and corporate stabilization to deal with, but those issues are coming into sharper focus, and you can make plans to offset expected costs.
Your credit union’s strategic planning team should be aware of the following 10 trends. They’ll affect your credit union either directly or indirectly, and your team needs to develop strategies to address them.
1. Board education
NCUA is raising expectations of federal credit union directors, according to the rule on fiduciary duties it issued in December 2010. At a minimum, directors should be familiar with basic credit union finance and accounting practices, including the ability to read and understand a balance sheet and income statement.
If it doesn’t have one already, your board needs to adopt a culture of continuous learning to live up to its fiduciary duties. It must stay informed of relevant information that could affect its decisions. While a board can delegate operational tasks to the president/CEO, it can’t delegate its responsibility to ensure safety, soundness, and compliance with state and federal laws. Director education and financial proficiency have become absolutely critical.
Credit union loan balances are expected to rise 4% in 2011 and 6% in 2012 following a 1.5% decline in 2010. Auto loans, private student loans, credit card loans, and purchase mortgages will hold potential for most credit unions through 2012.
Student loan debt outpaced credit card debt for the first time ever last year, and it’s likely to top $1 trillion this year. Last year, graduates who took out student loans left college with an average $24,000 in debt.
This will likely to grow more quickly with the coming round of budget-slashing. Pell grants for low-income students are expected to be cut and tuition at public universities will probably increase as states with pinched budgets cut back on the money they give to colleges. The recession created a large pool of potential borrowers with subprime credit scores. Credit unions with disciplined underwriting and subprime pricing will see significant lending opportunities.
Next: Earnings pressures
Credit union earnings will climb back to 60 basis points (bp) this year and 70 bp in 2012 (after NCUA’s corporate assessments of a projected 20 bp this year and 15 bp in 2012). Through 2012, rising earnings will be supported by lower loan loss provisions, rising net interest margins, and continued cost-containment efforts.
Don’t expect a significant drop in interchange income this year, but you might see a 10 bp hit in 2012. Stronger earnings will push the growth of capital above asset growth, raising credit union net worth ratios to an average 10.4% by the end of 2012.
4. Housing and mortgages
Today, one in 10 mortgage holders (five million Americans) owes at least 125% of their property’s current value. The degree of negative equity is the best predictor of the likelihood a borrower will engage in a strategic default.
Your credit union must take loan-to-value ratios seriously. Consider requiring new borrowers to put down 10% to 15% of the property’s value.
Home prices, down more than 30% nationwide since their peak in 2006, are expected to fall another 5% this year before stabilizing in 2012. The big housing worry, however, is the amount of shadow inventory of homes (foreclosed or seriously delinquent houses) that will eventually come onto the market.
If the number of distressed homes coming onto the market continues to rise, expect further home price declines and more underwater homeowners. Roughly 10% of all mortgages currently are at risk of foreclosure.
5. Young and unaware
Nearly 70% of consumers ages 18 to 24 are “not at all familiar” with credit unions, according to CUNA’s 2011-2012 Survey of Potential Members. No other age group has such a high level of unfamiliarity with credit unions. Your credit union will need these young consumers for future loan and membership growth.
The credit union movement hasn’t had a national advertising campaign during the past couple of decades, which helps explain why the youngest consumers have the highest levels of unfamiliarity. If a national ad campaign isn’t affordable or politically palatable for today’s credit union movement, your credit union will have to come up with its own strategies for elevating awareness among young consumers within its field of membership.
The Hispanic American population is exploding. In the past decade, it grew 43% and the non-Hispanic white population increased 1.2%. Hispanic Americans now number 50.5 million, or 16% of the 308.7 million U.S. population.
The median age of non-Hispanic whites is 41, compared with 27 for Hispanics. By 2019, non-Hispanic whites younger than age 18 will go from the majority to the minority. Non-Hispanic whites are expected to become the minority by 2041 when compared with all other ethnic groups.
7. Mobile banking
The coming year likely will represent the “tipping point” for mobile banking adoption. The next generation of members will want your credit union to offer full financial functionality on smart phones and tablets.
Credit unions offering mobile banking often start with alerts and information about account status, expand the service to include mobile transactions, and then move to person-to-person electronic funds transfers.
Mobile banking is quickly becoming a competitive necessity. Nearly 20% of credit union members who don’t currently use mobile banking would switch financial institutions to get it.
And 50% of consumers ages 18 to 25 say mobile banking is “extremely important” when selecting a financial institution, according to research from Mercatus.
Next: Social media
8. Social media
Credit unions will continue to increase their social media presence. While it comes with risks, social media also carries the risk of opportunity lost if you don’t use it intelligently to benefit your credit union and its members. Most credit unions have an established presence on social networks, and many use social media to interact with members through blogs and chat.
Credit unions will fine-tune their use of social media in the next few years. Some are even replacing websites or portions of websites with social media sites. Cost and traffic are factors in the decision to move resources toward social media and away from websites.
9. Hiring and pay plans
Keeping overworked employees motivated and performing at peak levels will be the greatest human resource challenge of the next few years. To do this, employers will need to improve morale and engagement levels, and boost retention efforts.
Employers have grown accustomed to getting the job done with fewer employees. And employers that must hire additional staff are turning to part-timers or temporary workers until the economic rebound proves itself.
Credit unions have budgeted average wage increases of just more than 2% for management and nonmanagement employees in 2011. Only 39% of credit unions plan to initiate or maintain a pay freeze in 2011, down from about 45% in 2010.
• 2011-2012 Credit Union Environmental Scan: 100-page report, DVD, PowerPoint, Strategic Planning Guide, and monthly newsletter.
The sheer volume of new laws and revised regulations is overwhelming for most credit unions. About 75% of CEOs say it was “very challenging” to remain in compliance last year. And only 50% are confident their credit unions are actually in compliance.
Major regulatory changes during the next two years will fall into three categories: The Dodd-Frank Act, which includes the debit interchange rules and a new Consumer
Financial Protection Bureau; mortgage compliance; and NCUA actions.
Set aside ample financial resources to meet your credit union’s growing compliance burden. New rules will require changes to documents and processes, as well as
increased staff training.
All credit unions have been affected by the recession, but there are stark regional differences in the severity of the recession. Each credit union will have unique challenges and opportunities in the future.
But the next few years will test the ability of all boards and senior management teams to deal with thin earnings, low consumer awareness of credit unions, sluggish loan and membership growth, and a compliance burden that will only get heavier.