Managing Balance Sheets Through Uncertain Times


The bad news seems to keep getting worse.

The coronavirus has continued its ominous march across the planet. Pandemic contingency plans have been activated, while schools have been closed. The cancellation of numerous sporting and social events have caused sadness and store shelves are bare. And the word “historic” keeps showing up alongside news about the economy – as in, “historic stock market declines” and “historic lows for the 10-year Treasury.”

Credit unions, like everyone and everything else, are being impacted as economic activity declines. For credit unions, loan losses are likely to materialize and income is likely to shrink.

But in troubled times, credit unions can shine.

After all, it was during the Great Depression that the nascent credit union movement really took hold. Unlike banks, credit unions earned support by operating under the “people-helping-people” banner.

Now, as the country moves from the known, to the unknown, credit union members will be among those impacted by uncertainty. Our members may become sick and unable to work.  The current war in the oil sector may trigger layoffs. As the travel industry grinds to a halt, the men and women who typically propel it, may soon be without paychecks. Not to mention, the countless men and women that ensure every sporting event occurs.

Credit unions can do more than deploy extra hand sanitizerAssuming they can find it.

Credit unions can align toward member needs by promoting skip-a-payment loan programs. Instead of watching loans default, proactively work with hard-hit members to pass on a payment or two, and add those payments onto the end of the loan terms. This helps both members as well as credit unions. Members find compassion as well as a kind, helping hand, while credit unions benefit from building member loyalty and working to ensure loan performance.

From a balance sheet strategy standpoint, in times of uncertainty, building liquidity is typically prudent.  However, with the recent Fed move dropping the overnight rate down to zero, we need to look at liquidity in terms of more than just cash balances. We should also look to securities that are deemed highly-liquid. The importance of these securities is that they are relatively short in maturity term, and markets are deep with significant volume, meaning credit unions can get in and out of the securities with minimal price impact, if needed. Also, during critical times such as these, the rate of return is generally superior to cash balances. If cash is king in times of uncertainty, then high quality liquid securities are queen.

In the loan portfolio, members will likely take advantage of the drop in interest rates to refinance their mortgages. They are going to do it with or without you. This means a reasonable strategy may be to get ahead of the trend and proactively help members refinance. This strategy enables you to keep loans on your balance sheet and earn some fee income during the process. The alternative? Watching the loans go somewhere else.

In summary, be proactive in identifying loans that could potentially go bad and develop solutions to help members and your balance sheet. Build liquidity, but not necessarily cash balances (high quality liquid assets and a robust contingency liquidity position to limit cash holdings) and be prepared for a refinancing wave. If you are not prepared for the demand, someone else will be.

This is our world today: challenging, bottom-line shifting balance sheet strategies and a compelling call to serve our members.

Article by Mark DeBree, Managing Principal at Catalyst Corporate FCU.