CFOs Offer Big-Picture Projections

Loan growth, jobs, and risk management are critical to future success.

May 1, 2012

No job title analyzes the nitty-gritty details of credit union financial performance and projections more than the chief financial officer (CFO). How do CFOs view credit unions’ outlook in the months ahead?

In some areas, members are loosening their purse strings and job creation is picking up. Still, the economy remains vulnerable and is accelerating at a slower pace than expected in a recovery. Of course, the big picture on the economy and financials varies by region and type of credit union.

The new norm

Modest economic growth is likely during the next 12 months, predicts Hudson Lee, CFO of $1.1 billion asset Meriwest Credit Union, San Jose, Calif.

He expects gross domestic product (GDP) to increase 2%.

“Generally, the economy is relatively stable at this juncture. But we need stronger new-hire numbers to really see a faster, sustainable expansion.”

San Jose is located in Silicon Valley, where employers can’t fill certain high-tech jobs fast enough. But a ripple of new hiring activity in general is beginning to be felt in the area, says Lee. In Santa Clara County, where the credit union is located, unemployment has been hovering around 9% for several months.

To grow the economy, delinquency rates need to improve along with loan demand, he says. While foreclosures have been a pattern of the California landscape in recent years, it isn’t a pervasive theme.

The impact of the real estate crisis depends on the zip code, he explains. “The further inland from the coast you go, the more heavily affected are the homes that ran up in value in the years between 2005 and 2007.”

Currently, Meriwest is primarily focused on delinquency and loan-to-share ratio financials. “There’s a lot of liquidity right now with a decrease in loans and an increase in investments,” says Lee. “The loan-to-share ratio is the lowest I’ve seen in the 11 years I’ve been with the credit union.”

While the credit union is cautiously optimistic about a sustained economic recovery, he says, “We have to remember this is the longest economic downturn that the country has experienced since the Great Depression.”

Consequently, he says, it’s an entirely different world of lending today. “We’re all operating with a new norm, with unanswered questions about numerous global scenarios that affect our domestic economy.”

The days of consumers borrowing against their homes are long gone, he says. “It wasn’t that long ago that unemployment was low. Are we going to be able to return to low unemployment rates where we once were? I don’t know that we can.”

Credit unions aren’t alone in restructuring their balance sheets, he says. “Borrowers are in the same boat. They’re taking a hard look at their finances, and many aren’t willing to take on more debt. As credit unions, we have a big job ahead to stimulate more loan demand and capture more of this market.”

Next: All about risk

All about risk

At $630 million asset Red River Employees Federal Credit Union, Texarkana, Texas, CFO Sonya Jaynes says her credit union is cautiously optimistic. “Our biggest challenge right now is increasing loan growth,” she says.

“Overall, Texas hasn’t been hit hard by the economic downturn like other parts of the country,” she adds. “That’s especially true in our area. At the end of December, unemployment in the Texarkana area was a little less than 7%.”

Red River Employees Federal recently initiated a loan growth strategy that might seem to run against the grain of the conservative organization, she says. The credit union was established in 1943 with an Army depot as its core sponsor.

Over the years, the depot has downsized, and many of the credit union’s 63,500 members are now employed by its 350 select employee groups and other area employers.

This year, the credit union is projecting 10.5% loan portfolio growth. “That challenge requires new strategies and opportunities for members, as well as the credit union,” she says. “We’re now looking at more than members’ credit scores when they apply for loans. Their credit history with us will be one of those factors.”

During the next several months, especially in light of new NCUA rules, the credit union will monitor interest-rate risk, concentration risk, and investments more closely.

“It all boils down to risk,” says Jaynes. “If interest rates go up—even though the Federal Reserve has said that won’t happen until 2014—we need to be prepared. We don’t want to extend our investment portfolio out past three years even though we’re allowed a four-year window.”

The credit union hasn’t had to lay off employees or cut credit union services. It’s continuing to offer new services and look for growth opportunities. Some local financial institutions geared to younger demographics are getting away from doing business face-to-face.

Red River Employees Federal is bucking that trend by inspiring members to visit them online or in person. “We still provide face-to-face service at 21 branches, including five located inside area high schools. And we’re still growing,” she says.

Today, more people are looking to CFOs for guidance and profitability, she adds. “CFOs have always been responsible for providing detailed financial information to help with strategic decision making. But with the economic environment credit unions operate in today, our involvement has never been more critical.”

Opportunities ahead

During the next 12 to 18 months, Jim Holle, CFO with $380 million asset Community 1st Credit Union, Ottumwa, Iowa, expects slow economic growth.

“Right now the economy is kind of bouncing along the bottom and I don’t expect a large bounce back in the future,” he explains. “Consumer confidence is low, and that puts the average member in a ‘save versus spend’ mindset. So loan growth is hard to generate.”

With that said, credit unions are in a position to do well during the next year or so, he says. “Anti-bank sentiment—due to government bailouts and significant fee changes—has given credit unions a unique opportunity to differentiate themselves as a safe alternative to banks.”

While credit unions nationwide generally have fared well during these challenging economic times, relationships with agricultural businesses in Iowa have helped balance the risk, he says.

“In the past,” explains Holle, “when other markets were in high growth, the agricultural Midwest had slow growth. And when markets elsewhere dropped significantly, these markets did so but at a less drastic rate.”

Two factors have kept agricultural business in a
solid position compared with other industries, he says. “It’s an industry that’s almost impossible to outsource overseas, and the world will always have to eat.”

Community 1st expects to pay close attention to interest-rate risk in the months ahead. When interest rates do increase, Holle says, “That margin will be squeezed with deposits supported by income on loans at the lower rates of the past few years.

“When rates were going down,” he continues, “credit unions were able to generate higher than normal returns. In the coming months, credit unions will need to have enough built-up reserves to cover the time lag between changes in deposit and loan rates.”