Five New Year's Resolutions For CU Policies

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The past two-plus years have been good ones for the credit union movement, but an improving economy will actually increase risk in 2004, according to one analyst.

Kenneth Thygerson is the president and founder of Digital University, a virtual training and information center for employees in the financial services industry based in La Jolla, Calif. Thygerson, who holds a doctorate and is a professor emeritus of accounting and finance at California State University, San Bernardino, led an educational session at the recent CUES Directors Conference here.

CUs should "savor the last two and a half years" said Thygerson. "Growth in shares and deposits increased twice as fast as loans. Credit union managers reacted promptly by dropping rates on deposits fast and deep. Credit unions took appropriate, aggressive action over the last 12 to 18 months."

Credit unions have also done a good job on managing net overhead: revenues and expenses in relation to assets. "I wish I could forecast this will continue, but I can't," Thygerson said.

One of the biggest problems Thygerson sees in the coming months is a rise in interest rate risk. With credit unions entering the mortgage lending business more than ever, they are exposed. He said the demise of savings and loan institutions was triggered chiefly by an interest rate rise.

"The bottom line is, mortgages involve risk. Servicing mortgages also is risky," he added.

Thygerson offered five policy suggestions for credit unions in 2004:

First, develop strategies to find quality loans or control savings flows.

Second, increase fee-based income sources to offset margin squeeze. "Fee income has been growing by double-digits in 2001, 2002 and the first half of 2003," he said.

Third, CUs should shore up liquidity sources in case of major share/deposit outflows.

Fourth, control interest rate risks by reducing fixed-rate mortgage holdings through secondary market sales.

Fifth, be leery of investment bankers offering simulated performance analyses of mortgage securities and derivatives.

Why High ROAA?

In the past three years, Thygerson has interviewed the CEOs of numerous credit unions that achieved the best scores on return on average asset, or ROAA. He said the CEOs of credit unions in the top 30% of ROAA tended to echo each other with the same reasons why.

"What we saw was a board and management emphasis on profitability, capital adequacy and ROAA. These credit unions had a clear and easy-to-articulate strategy and philosophy," he said. "High ROAA was a major objective of board and management for a long period of time, not something that just happens. The theme was: 'This is what we are, this is what we do.'"

In the case of some CUs that did not have excess capital, Thygerson said they realized they had to be profitable to survive and take advantage of opportunities.

Thygerson also examined credit unions that were in both the top 30% of ROAA and the bottom 10% of operating expenses. He said these CUs tended to be one of two types: the first type offered a limited number of services, emphasizing the services that were most popular with their members and did not try to be everything to everybody; the second stressed low costs and were not extravagant in their use of employees, equipment and office space.

"Again, management and directors at these credit unions stress managing expenses as the primary goal. Most had well-defined membership groups, which minimized marketing, branch, advertising and other expenses. Also, many used outsourcing to control head count and expenses."

Other suggestions Thygerson heard from these CUs on how to reduce expenses included: be a follower in technology, because there is a lot of risk in being cutting-edge; reduce cash transactions at teller lines by getting members to use ATMs; limit office space and therefore head count, because if office space increases, managers will find a way to fill it; and use equipment until it runs out.

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