BROOKFIELD, Wis.-With credit unions seeking to find all the "coins in the couch" that they can as the result of thin margins, one analyst is expressing concern over some of the risks he believes credit unions are taking on.
There is no simple "microwave solution" to growth in this era of uncertainty, said Orlando Hanselman, director of education programs for Fiserv risk and compliance.
"We are at point now, because our margins have been so compressed for so long with no relief in sight, that we are looking for those coins in the couch. I am sure many will find some, but at what future cost to our safety and soundness? Managing a credit union safely and soundly, on a profitable basis risk adjusted, is not about digging for coins in the couch, it is just plain hard work today."
Hanselman discussed four key areas of risk facing CUs today as they attempt to grow and the work that needs to be done.
With the potential for rising rates, Hanselman contended that many credit unions are overestimating the lives of their core deposits, having become complacent due to the ease at which deposits have flowed in the last 18 months. "Too many credit unions are treating these as core deposits."
CUs need to measure the duration of their equity. "They should transit line the direction of the duration of equities, put in controls over the limits on what the range of accept-able duration of equity is, make sure the board understands it, and review it at least quarterly. Once the credit union approaches range limits, they should take action to mitigate or transfer off some of that interest rate risk."
Credit Risk
Hanselman expressed concern for CUs' growing municipal bond portfolios, as well as with credit unions becoming more aggressive with indirect auto and home equity lending. Hanselman termed municipal bond portfolios risky and long in nature, feels the risk associated with indirect auto is not commensurate with the return (little long-term benefit), and that with still unstable housing prices it's too soon to jump in deeply with home equity.
"My advice here is to make sure underwriting standards are being monitored and maintained, and not relaxed," said Hanselman.
"Price for the risk. Make sure you have concentration and loan-type limits being carefully monitored by the board. This is not the time to relax standards or price aggressively to build volume."
Prudent Investigation
"I have no problem with adding new products after prudent and careful investigation, where the executive team and the board do their due-diligence and appropriately accept the risk with controls in place," said Hanselman.
But two products that Hanselman sees CUs rushing into are reverse mortgages and digital wallets. Hansel-man is not certain that the reverse mortgage, whose reputation and performance are questionable, is the right fit for credit unions. And digital wallets are so new that research should be done first before making a decision.
Cost-Cutting Risk
Continuing margin pressure is prompting some CUs to mistakenly attempt to cut their way to prosperity, Hanselman said, slashing budgets or jobs. He emphasized that credit unions instead should focus on understanding the cost of offering products and delivering their services to reduce the price to the credit union for both.
"We must get back to the basics of flow charting our delivery processes from the time a member asks for a product, to the time it is fulfilled, and every step along that route. How many people and how much paper-work are involved? How often does paperwork get passed from one department to another? ID the bottlenecks and redundancies."
That efficiency approach not only saves time and money for the credit union, it makes service delivery faster, increasing member convenience, according to Hanselman. "That allows you to charge a little more too, because people will pay for convenience."
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