2009: Planning In Chaos
In a tanking economy, do you reach for opportunities?

By Richard H. Gamble

Editor's note: The following first appeared in the May 2009 issue of Credit Union Management.

Leap or duck? That is the credit union executive's dilemma when the economy is tanking and other financial institutions are being hurt worse than CUs. Now that most strategic plans are a shambles because of events that virtually no one planned for, do you re-plan for the rosy scenario and leap at golden opportunities or do you re-plan for the grim scenario and duck away from grave risks?

There's no easy answer. Some of the brightest minds in the industry-savvy, respected veterans all-are preaching the "leap" message. "There's a huge vacuum forming. CUs can fill that vacuum or wait while others fill it," says Michael Mavaddat, executive vice president for innovation and development at Decision Strategies International, Conshohocken, Pa., and an author of the 2015 Scenarios for Credit Unions in North America report just released by CUES and DSI. "It's a great opportunity that is unlikely to come again any time soon. This is their moment."

Financial executives are in shock, and people in shock tend to stand still, he observes. "People are exhausted and suspicious, even paralyzed. It's natural to retreat into passive behavior, but that's not constructive. Don't plan for the crisis; plan past the crisis," Mavaddat urges.

In dangerous times, executives, including CU leaders, tend to be reactive, but the key to planning for a better future is to be proactive, advises John Oliver, president of Laurel Management Systems, Palm Springs, Calif., and CUES' partner in CU: Planner: A Strategic Planning

Process. Institutional success rarely comes by accident, he insists. "It comes because people plan for it. You can't win with an 'if we build it, they will come' strategy."

Relying on exotic financial instruments has laid low many of the powerful financial institutions. CUs, which largely avoided those mistakes, now have huge opportunities, but only if they reach for them, he says.

"I'm a great believer in seizing the moment and pressing on, provided that a CU has the capital to do that," says Dennis Dollar, principal partner of Dollar Associates, Birmingham, Ala., and former chairman of the National Credit Union Administration. "Healthy credit unions can't afford to miss this window of opportunity," he insists. "Every day we read or see news stories about bank failures, bank bailouts and arranged bank mergers. As the familiar bank signs come down and familiar bankers disappear, a lot of financial relationships are in play. Credit unions have a rare opportunity over the next 12 to 18 months to take significant market share away from troubled banks."

Not Time To Grow
Down in the trenches, not everyone sees it that way. Such aggressive planning past the crisis is smart and visionary but impractical, insists CUES member Kirk Kordeleski, CCE, CEO of $3.3 billion Bethpage Federal Credit Union, in Bethpage, N.Y. "When you're sitting in an economy that has not yet hit bottom and has brought devastating losses in states like California, Arizona, Nevada and Florida, you have to think about what could happen if that spreads to your market.

"To go out and take on additional growth at a time when loan losses could pile up and when higher insurance premiums are taking away your net income could mean that your next strategic plan will be written by the NCUA," Kordeleski warns. "I respect the wisdom of experts like Dennis Dollar, but he's not sitting where I'm sitting. If we don't hunker down and be very conservative in this economy, I'm afraid the risks will outweigh the rewards," he explains.

Mavaddat points out he advocates pursuing growth only within an organization's means, especially in light of the NCUA's recent move of placing U.S. Central Federal Credit Union and Western Corporate Federal Credit Union into conservatorship--and levying a hefty surcharge on natural credit unions to replenish the National Credit Union Share Insurance Fund. "Kirk's response is reflecting the realities of his business, especially in light of the NCUA surcharge," Mavaddat writes via e-mail.

Logically it makes sense to anticipate the end of this terrible economy, but "nobody has judged correctly in the past 18 months just how bad this market is," Kordeleski notes. "Bank of America thought they were getting a great deal when they snapped up Countrywide for $4 billion. Now it's clear that they should have been paid $40 billion to take it. The Merrill Lynch acquisition looked like a great business decision at the time, but it turned out badly." In this market, he insists, you just can't bet the ranch on what looks like a smart business strategy.

Ordinarily, Bethpage FCU is a big strategic planning CU. "We've used scenario planning for eight or nine years," Kordeleski reports. "We take a pretty dramatic approach to our scenarios and run outliers, looking at best-case and worst-case scenarios. We know that none of the scenarios will be correct, but we assume that pieces of them will be correct, and it's just good planning discipline to try to think of the good things or bad things that could happen."

In fact, what has happened is much worse than the CU's worst-case scenario. "Nobody could have foreseen anything this dire," he observes.

For Bethpage FCU, 2008 was a year to update its strategic planning scenarios, so when things started to go badly wrong in the economy, Kordeleski ordered his planners to develop the usual long-range plan covering three to four years, but he also ordered a second plan, dealing with just the next 12-18 months. As events unfolded, the short plan has become the useful one.

"We're working under two plans," Kordeleski says. "One is our fairly familiar growth-driven plan that assumes 10 percent annual growth and looks at how to fund and provide adequate capital for that growth. We've been a growth shop since 2000," he explains. "We've been doubling every five years, building size to survive. That's a natural plan for us.

"But we're working under a second, very different plan now that emphasizes expense control and margin management instead of growth. That's a real change for us. That awful insurance premium increase wiped out the $20 million net income we had planned for 2009, so now we're doing everything we can to rebuild some net income in the early months of 2009 so that we'll have a cushion in case loan losses get worse later in the year. We're looking at high unemployment and preparing for the loan losses that go with high unemployment."

The insurance premium increase triggered "Plan C" for Bethpage FCU, and Plan C includes tough expense controls. "We're cutting travel, marketing and our use of outside experts," Kordeleski says. "We've let a few jobs run off, and we're being very careful with positions we fill. So far we haven't really cut staff, but we've planned where we would cut if we have to."

All this gloom and doom comes at a time when Bethpage FCU is experiencing a boom in mortgage originations and strong deposit inflows. "Deposits dollars are coming in briskly, and the mortgage market is out of this world," Kordeleski says. "We've cut our deposit rates, but it's hard to cut them to the bone. In normal times, we'd have to pay 25 basis points more than the highest rate in our market to attract much in the way of new deposit dollars. Now we're offering 25 basis points less than the best rate in our market (often offered by Citigroup), and we're still getting a deposit build-up."

How to control growth in the face of a deposit inflow is a real problem. "We just can't find a positive way to use the funds in this market," Kordeleski explains. "There aren't suitable investment opportunities that pay more than our deposits cost. We're doing a big business in mortgages but then selling them. There's little demand for auto loans." Growth is easy, but margins are another story.

Other CU executives are more optimistic. "Members need us now more than ever," says CUES member Mark Caverly, executive vice president of $850 million, 170,000-member Local Government Federal Credit Union in Raleigh, N.C. "They don't need us to retrench, cut costs and freeze hiring." His CU has introduced a free financial counseling service that emphasizes debt management. "We think there are special opportunities today, and we intend to take advantage of them."

Blast The Message
For CUs that take the growth path, the first move toward seizing current opportunities, Oliver says, is to "blast out the word" that credit unions are safe and healthy and present the best alternative for people who want to save or need to borrow, he says. It's not enough to let members know. It's not even enough for individual credit unions to let their local markets know. There needs to be a concerted, coordinated national PR surge. "CUs are always saying they are different, but today they are dramatically different," he says. "This is a time to really differentiate and take back market share that has been lost to nontraditional financial players."

Like politics, all opportunities are local, so pay close attention to your own economy, advises Bruce Jolly, a partner at the Washington, D.C.-based Venable LLP, law firm and a former CUNA Washington counsel. "If you're an employer-based CU, look closely at how your industry is faring," he says. He's skeptical about what help outside experts can offer. "Nobody knows the local market like the local managers and board. Listen to your members. High-priced consultants often tell you what you already know."

Many of the biggest opportunities lie on the lending side, some of them specifically created by the crisis. There should be something of a boom in home renovation loans, Dollar predicts. Stagnation in the housing market means that people are more likely to fix up their old homes instead of buying new ones, he notes. Much of the renovation will be driven by tax credits now being offered for energy efficiency upgrades, so a good CU lender will be well versed on residential energy and tax credit programs.

As banks retreat from lending, CUs stand to pick up many small loans, including auto loans, Dollar says. Banks are battered by mixed messages to lend more or play it safe. Generally, they are heeding their regulators and tightening their underwriting. As their reputation as tight-fisted lenders spreads, credit unions, under less regulatory pressure, have an opportunity to thrive as prudent but accommodating lenders, he explains. "Consumers still need a dependable car to get to work. This is a real opportunity for CUs to meet a pressing need and attract profitable business," he points out.

Business lending is another promising opportunity for CUs that target that market, Dollar says. "Most CUs have decided whether they want to make the investment to support business lending. If it's in your strategic plan and you have the capital to support it, now is a good time to go for it," he reasons. Because of layoffs by large commercial and investment banks, a lot of experienced business lenders are looking for jobs, he points out.

Hiring Hot Shots
The crisis has created opportunities to hire remarkable financial talent, but CUs need to be careful what they buy. While wholesale layoffs at large commercial and investment banks have made many experts available, don't hire a hot shot just because you can, Mavaddat cautions. "They may bring remarkable skills, but ask if this is a skill set you need for the future." If you hire an exceptional individual, you have to be prepared to build an organizational competency around them, one that would survive if the star expert leaves. And chemistry is critical, so don't hire someone who doesn't fit your culture, he says.

Staffing should be a key part of any revised strategic plan. If you have an employee who is not performing, this is a good time to let that person go, but rather than reducing staff to cut costs, it may be better to involve staff in meeting the challenges. "Push strategic thinking deeper into the organization," Mavaddat urges. "When employees are more engaged in shaping the destiny of the CU, their morale is lifted and they work better as a team." Leadership development and training will reward you in both good and bad times, he notes.

Think outside the box, Oliver advises. "Whatever financial services will look like in the future, they won't look like they do today," he notes, "and CU management that is stuck in a this-is-how-we've-always-done-it mindset will miss the boat." Years ago, traditional financial institutions enjoyed something of a monopoly, which led to costly complacency, he argues. In 1970, consumers kept 50 percent of their assets in traditional financial institutions. Now that share is under 20 percent, he reports. "That should be a wake-up call to plan for a different future," he emphasizes.

CUs with good strategic plans will not be hiring people who like stability and order and who have experience with financial services as they are now offered, Oliver insists. They will be hiring innovative, high-tech people. And that often means hiring young people. CUs with aging management should be making particular plans to bring in and advance young managers for the future. "My daughter does business with her cell phone and her thumbs," he notes. "That's completely alien to me, but she is the future." How CUs hire, motivate, train and reward people has not changed much for decades, but it needs to change, he cautions.

In planning for the post-crisis future, CUs should be looking for ways to specialize, Oliver says. "In any field, specialists are always paid more than generalists, and most CUs are seen as generalists." How can a CU specialize? He cites the case of a community bank that saw an opportunity to position itself as a specialist in health savings accounts. "It was just a small community bank in the Midwest, but now My HSA Bank has links on thousands of insurance agents' Web sites," he reports. "The goal should be to break out of the herd."

Proactive strategic planning, Oliver says, can't be done at an annual retreat. "Credit unions need to plan like Apple Computer does-constantly," he advises. CUs need to form a strategic planning team that becomes a permanent part of their culture." They should come from every functional area and meet at least monthly, he says.

The very volatility of today's financial markets could be good training for future CU success, Oliver says. "Future financial institutions will need to be quick at reacting to changes in circumstances. That's something CUs haven't been very good at, but they're learning."

Richard H. Gamble is a free-lance writer based in Colorado.

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