Why Conservative Strategies Pay Off
SCOTTSDALE, Ariz.-Credit unions considering aggressive methods to improve the bottom line should instead be content with more conservative strategies, insisted McGuire Performance Solutions (MPS).
MPS President Bill McGuire said this year calls for getting "two to three yards and then a quick pass for the first down. You work your balance sheet as hard as you can without taking undue risk. Right now, when I look at credit union balance sheets, they are holding an awful lot of liquidity and are staying generally short on assets. That has a negative impact on earnings."
To get out of that rut in 2011, McGuire said CUs need to dig into the balance sheet, look at what they own, and manage at the margin. "Manage a little more effectively and raise earnings. First you get your house in order with an asset liability management model you can trust. You have to have measurements on how your balance sheet actually behaves-have a really firm foundation or accurate speedometer on where you are and what will happen when interest rates rise."
McGuire said that understanding should include knowing how loans prepay, what will happen to HELOCs in the current environment, and how stable and long-term core deposits are.
"Maybe take some assets and extended them out to 2.5 to 3.5 years," offered McGuire. "Then we will pick up yield, not a lot, but some, and that does not really impact our exposure. It just means that if interest rates go up 300 basis points we may not do quite as well. But it will be a long time before that happens."
The flip side, said McGuire, is looking at funding. "Do I really need two- and three-year CDs to get that money when I already have it in share drafts-long-term stable funding."
With investments paying very little, McGuire suggested focusing on first mortgages. "I am not recommending credit unions make a lot of 30-year mortgages, maybe a selected number of 15-year loans. And what about 3-1 ARMs that are properly underwritten? There are ways to extend the average life of the loan and pick up margin without making the kinds of bets that are not sensible now."