PASADENA, Calif.-The process of running a credit union is significantly more complex and time-consuming these days, thanks to a sharply increased need to monitor the overall economy.
That was the message from Darren Williams, CEO of Wescom CU, based here. Asked what it is like to run a credit union in California these days, he quipped: "These are exciting times. Not necessarily fun, but definitely exciting."
CUJ: What are the biggest challenges?
Williams: With respect to management, we are having to spend a lot more time and resources managing credit risk in the institution. We have had to develop a lot more analytics and sophistication.
I've been in the credit union business for 25 years, and things that used to be intuitive as far as managing risks now are much more scientific. We have had to develop modeling and forecasting capabilities for economic information. We have had to forecast loan performance, delinquency trends and charge-off data.
We always have had to look at our own numbers, but now we are being affected by the broader economy and are monitoring unemployment data, housing values, foreclosures, FICO credit scores on a nationwide basis and much more.
It is much more comprehensive than ever before, because it is so much more than just knowing our members and serving them. We don't operate in a vacuum.
CUJ: What direct and/or indirect effects is your CU feeling from the housing market?
Williams: Looking at direct effects first-as with any large, community-chartered credit union, we are a big real estate lender. The decline in the Southern California real estate market has been severe and it clearly has hurt our members. Some of them might want to refinance a bad loan with another lender, but because the value of the house has declined $150,000, we are not able to help that member, as much as we might want to, because the value of the house doesn't support the loan.
We have seen many loans where the loan-to-value ratio is beyond 100%. Some people just walk away from those situations. For those who have to move because of a job transfer or other reason, they sometimes come to us to work out a short sale, which is a loss for the credit union.
As for indirect effects-we have members who got into bad loans with other lenders, and they are seeing loan payments resetting as teaser rates expire. Or, because they have negative-amortization loans, and in order to make that payment, they have difficulty making the auto payment or keeping the credit card current. When members don't come to us soon enough, sometimes we can't help them.
We have seen consumer loan delinquency and default rates increase, and we believe that is partially if not largely driven by problems in the housing market.
CUJ: We've talked about this before because IndyMac was headquartered right there in Pasadena, but have the failures of IndyMac and WaMu allowed you to gain members and/or deposits?
Williams: Anecdotally, we have tracked deposit growth in the weeks following the news on those two banks. We saw members bring deposits over from IndyMac, and we have seen deposits from customers of other financial institutions that have been in the news.
Clearly, coverage of financial institutions' problems has created awareness of safety and soundness. The increase to $250,000 has helped ease fears, but we still see consumers turning to financial institutions they trust and have greater confidence in.
We recently did a survey that asked if people consider Wescom to be a trusted financial partner, and just under 90% responded positively. I think credit unions in general stand to benefit long term from what is going on. Depositors who didn't give it a second thought before are thinking, "Who do I trust?" and "Where do I want my money?"
CUJ: What are you doing to get the word out that Wescom is safe and sound?
Williams: We are not doing anything outside of our normal advertising campaigns. We've seen some campaigns that almost played on the hysteria and concerns, and we certainly wouldn't want to do that.
Two-thirds of our new members come to us from word of mouth, so our most effective way to generate new members is to talk to our existing members and encourage them to tell family and friends about us.
CUJ: Are economic conditions in your market still worsening, or have things already hit bottom and are improving?
Williams: I wish I knew that. This goes back to the first question about the challenges of managing a credit union today, because there are so many things going on. No one is going to be able to call the bottom until months after it hits when we can look back and say, "okay, that month was the bottom and then things started to improve."
However, we are hearing anecdotally that we might be close to hitting the bottom. For example, homes that have received no offers for nine months have been getting offers in the last 90 days-in some cases even multiple offers. Granted, these offers are $200,000 below the original asking price, but that is what had to happen-prices had to go down before offers started coming in again.
We probably are getting close to the bottom, if we're not there. I am cautiously optimistic.
CUJ: How is lending going?
Williams: We are still in the lending business. We are a credit union and that's what we do, but consumer demand is down. People are being much more cautious. They are not buying cars or homes like they were doing.
September's total loan production was about one-third or even one-quarter from the same month two years ago. Then again, two years ago was not a normal level-interest rates were low and people were buying homes in large numbers. We had that hyper growth going due to housing appreciation, and that was unsustainable. This is a hard lesson we've all had to learn.
