What’s Your Plan C?
It’s a poignant question that applies to so much of life, including business plans.
Sometimes, the best lessons in life are learned informally, in random remarks made in odd settings. For example, after my (soon to be) wife and I became engaged, I met her paternal grandmother.
After looking me up and down—the same way a leopard decides which gazelle has a limp—she turned to my wife and asked, seriously:
“Okay, so what’s your Plan B?”
It’s a poignant question that also applies to business plans. My credit union’s business plan calls for a rough balance between increased deposits and increased lending. But for some reason, members haven’t bought into the latter part as much, resulting in an increasing imbalance.
With my Plan A looking as sturdy as a pup tent, it’s time for Plan B: investments.
But which ones? Federal Deposit Insurance Corp. (FDIC) certificates? Loan participations? Justin Bieber-autographed memorabilia?
Here are some of the more popular investments, along with their risks and rewards:
- FDIC certificates: They’re insured up to $250,000, easy to buy, and liquid if you pay a penalty. On the other hand, it’s a bank you just invested in, you idiot! Banks sometimes (often) go bust.Best for: credit unions that can manage large lists of investments.
- Corporate capital: Most of these investments propose a very attractive rate. But facing your board could be rough after you tell them you invested funds in a corporation that went kaput. Best for: investors either new to the industry or with very short memories.
- Loan participations: They offer good rates, but they’re still “loans.” At times, participations are like buying discarded items from a garage sale. Best for: credit unions that have very low loan-to-share ratios or those that like to invest in things like “indirect loans made in North Burbank.”
- U.S. Treasuries: These are more liquid than unrefrigerated gelatin. You call them rates? Best for: credit unions so conservative they think the Amish are “extreme.”
- Collateralized mortgage obligations: The reward: There are plenty of these to buy. The risk: There are plenty of these to buy. Best for: credit unions that have boards with no memories.
- Municipal securities: These offer good rates, and are often local investments. Most local governments, however, have as much control of their spending as a teenage daughter at a Forever 21 store. Best for: strong, local credit unions that really know their communities, or at least know the mayor.
- Mutual funds: The rates are better than Treasuries, but not much better. Best for: credit unions that can stomach the thought of “breaking the buck” (income doesn’t cover operating expenses).
- Shared certificates: Returns are better than Treasuries—they cover the cost of the paperwork. But rates are worse than investing directly. Best for: investors that hate paperwork.
- Brokered deposits: These offer good returns, although using a broker will make your examiner shake nervously like a scared Chihuahua. Best for: investors with lots of nerve, guts, or love of skydiving.
All these investments force credit unions to make distinct decisions about risk and return.
If you’re willing to accept possible default or lack of liquidity, a reasonable return isn’t difficult to find. If your No. 1 mandated goal is safety, however, it might be time to stuff the mattress.
And find a Plan C.
JAMES COLLINS is president/CEO at O Bee CU, Tumwater, Wash. Contact him at 360-943-0740.