CHICAGO - When NCUA examiners told Bohdan Watral that his credit union had set aside too much in loan loss reserves, the CEO of Selfreliance Ukrainian American FCU responded, "You never know what's coming around the corner."
Watral made that comment long before the latest economic trouble signs began to surface, when the CU was focused on building capital in the first half of this decade. That foresight to set aside more than adequate reserves has helped the credit union weather the economy and costs related to the corporate assessment. The philosophy of being extremely prudent with its finances also allowed SUAFCU to build capital from 12.5% in 2004 to more than 16% in 2007. Even after all charge-offs from the first round of the corporate rescue and hits from the economy, SUAFCU capital stood at 12.5% through March.
"We know there will be events that we cannot control," Watral told Credit Union Journal. "We like to have reserves and undivided earnings of roughly 25% of loans. Our primary focus is our total capital as a percentage of loans outstanding."
Selfreliance Ukrainian will further strengthen its capital position the same way it did before the economy headed into a tailspin — by managing expenses carefully. The credit union's operating-expense-to-gross-income ratio was 37.5% in December of 2008, and its employee-to-member ratio is 259-1.
A big area Watral believes SUAFCU saves over many other credit unions is in incentive programs for employees and senior management. "We pay competitive salaries, but we don't offer these extravagant bonuses, or retirement programs where you take a portion of your credit union's assets and put them into a stock fund. We don't have a golden parachute program tied to the CEO and senior management."
Watral believes that incentive programs are good when they reward correct behaviors. "You see many incentive programs in the industry that reward the wrong things — just growth in assets. Or they reward mergers without looking at the merger's specific effects on reserves and undivided earnings. Incentive programs should focus on the overall health of the institution, on long-term viability and not short-term success. Incentive programs should be tied to growth and reserves, stabilization of delinquencies, etc."
Reducing expenses often comes down to paying attention to where the credit union has the flexibility to trim costs. Today, Watral said some of those savings will come through lower costs on leased space. "These should be coming down. We have nine offices spread across Chicago, Illinois, Indiana, and New Jersey."
Travel budgets have been reduced, favoring videoconferencing for staff meetings and webinars for training, Watral said. Contracts are being closely evaluated, such as phone and IT services.
SUAFCU also does not pay a bonus dividend, which Watral contended can take away some of the credit union's focus on building capital. The CU prefers to give back to members though low loan rates and above-market deposits. Based on the Callahan & Associates Return to Member ratings, Watral said the CU is in the top 25% of Total Return of the Member in its peer group. "We also do not believe in building capital through fees," he said. "About 94% of the credit unions in our peer group charge more fees than we do."
At press time, Selfreliance Ukrainian American FCU paid 1.5% APY for one-year CD and charged 6.75% for 30-year fixed-rate mortgage.
It's not going to be a quick road back to strengthening or rebuilding capital for any credit union, Watral suggested. "This will be a very difficult year. Next year will be a little easier to increase earnings. There will be more opportunity because interest rates will be higher and spreads will be better."
