In October, credit unions along the eastern shore board fought back against Hurricane Sandy with every resource available. But the super storm is only the most recent in a long line of national disasters that remind cooperatives of the need to be prepared when inclement weather arises.
Not all weather related business continuity risks can be avoided, but their impact can be lessened with proper planning and a strategic operational mindset factors Alaskan credit unions are particularly well versed in.
Alaska may be the 49th state, but it ranks much higher in terms of the exigent weather and terrain that its businesses must overcome. Yearly snowfall in Anchorage averages 69.5 inches. And last winter the worst snowfall of the past 60 years dumped 134.5 inches by mid-April, according to Reuters.
The difficulties of the recession are increasingly in the rearview mirror, and the risk profile of credit unions credit card programs is likewise improving.Charge-offs reached uncharted territory in 2009 and 2010, topping 4%, but the industry has now posted two years of improvement. Credit union card portfolio charge-offs declined to 3% in 2011 and have declined further this year to an annualized rate of approximately 2.5%, helping card managers and senior executives sleep easier.
CREDIT CARD QUALITY TRENDS (% OF $)
Still, card charge-offs have not yet returned to their 2% pre-recession level, and it is unlikely they will. As credit unions incorporate looser membership profiles and attract new (i.e. unfamiliar) members, it is inevitable their credit card portfolios will have a hard time returning to sub-2% charge-off rates. Even if that does happen, such additional improvement is immaterial compared to the improvement already achieved.
More interesting than comparing industry averages over time, though, is comparing credit union performance against big bank competitors. Banks control 95% of the credit card market, with a high degree concentrated in the top handful, and their performance defines the competitive environment.
CREDIT CARD QUALITY TRENDS (% OF $)
At first blush this information looks reassuring: Banks charge-off at a higher rate than credit unions. That must be good, right? But credit unions must not get complacent. This initial observation masks three important developments:
1) Bank charge-offs are more than 500 basis points lower than they were in the recession. The banks are minting money in their card programs and growing their businesses. And, although national mailings and solicitations continue, the large issuers are more focused than ever on growing their card businesses within existing relationships and through their branch networks. Does this strategy sound familiar?
2) The spread between bank and credit union charge-off rates has narrowed. In fact, banks have never before come as close to credit union charge-off performance as they are today. This weakens one of the most important credit union competitive advantages with lower charge-off rates credit unions can offer lower interest rates than banks and still maintain a healthy bottom line. As the charge-off gap narrows, so does the pricing advantage. Larger sophisticated issuers have many advantages of their own; it’s disheartening to see a credit union advantage erode.
3) Banks are closer to approaching their all-time-low for charge-offs than credit unions. Only time will tell if this means the market is converging. As long as banks focus on relationship marketing and credit unions grow through new members and new member credit card accounts, the conversion will continue. And as it does, credit union and bank credit risk levels will draw ever closer.
Where does this leave credit unions? They’re pretty much where they’ve always been; fortunately, there’s more to it. There are more than 10,000 financial institutions in this country and more than 4,000 offer credit cards.Intense competition is the norm and the consumer is in the drivers seat. To continue as viable sources of fair, valued, and growing credit card businesses, credit unions must clearly understand their card program performance. Analytics matter.
For example, credit unions must have an understanding of current profitability levels and long-term pressures. A profit-and-loss report provides the clearest single picture of program performance and health and allows the issuer to better understand the impact of program changes. Tracking P&L allows credit unions to not only offer the fairest, broadest, most-valuable products but also provide comfort to regulators and boards who want to see a risk-management discipline is in place.
|Step 1: Portfolio Behavior|
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|Step 2: Earnings & Returns Measures|
|Click the graphic to view full size.|
A credit union must measure product risks including credit risk, adoption, usage, growth, and profitability if it wants to thrive into tomorrow.
Extreme weather caused $23.9 billion in combined property and crop damage last year, more than twice the amount in 2010, according to the National Weather Service.
Despite these challenges, Credit Union 1 ($826.9, Anchorage, AK) sees near-unlimited potential for its state, its institution, and its more than 70,000 members. With annual ROA of 0.86% and 12-month loan growth of 15.56%, according to Callahan & Associates Peer-To-Peer Software, the credit union is always moving forward even if it has to rely on unconventional means to make it happen.
Alaska presents some unique challenges, says Leslie Ellis, president and CEO of Credit Union 1.
The credit union knows how to position both its physical presence it has 15 branches, some so remote they are only accessible by plane and its technology it has growing online and mobile capabilities to guarantee a consistent experience for members.
Rethink Remote Operations
With our geographic constraints, there are two reasons we need technology delivery channels for our members and everything involving the credit union and its employees Ellis says.
The credit union has locations it cannot connect to via fiber or cable because of their remoteness. This limits the types of software program the institution can deploy, but it also challenges the credit union to think creatively about IT management and support.
Our IT essentially runs on satellite, Ellis says. That’s our data feed.
Subsequently, the credit union conducts all system updates through the headquarters in Anchorage and then pushes them to the outlier locations.
But it’s not just data the credit union manages from a central location. Virtual communication options allow the credit union to manage a majority of its in-person business functions remotely.
We can’t fly in all our remote staff for training, Ellis says. So options such as video conferencing and SMART boards present an affordable alternative.
Credit Union 1 relies on these technologies for its primary operations, but should a disaster occur, the credit union can instantly shift its resources to maneuver data, support, and operational guidance wherever they are needed most.
Develop Resources Before They’re Needed
Information is only part of the equation. There’s also the physical task of keeping the lights on and the doors open, so Credit Union 1 stockpiles supplies in its branches.
A big part of business continuity planning is knowing how to keep these locations running if there is a disaster in a remote area or if there is a service interruption and we can’t get there immediately, Ellis says.
The credit union has items such as generators and secondary heating systems as well as spare financial equipment, including the units used to create instant issuance payment cards.
When hunkering down is not an option, credit unions in remote areas need the ability to move operations or create alternative sites.
We’ve researched who would make a facility available to set up shop on a limited basis, Ellis says. We’ve also explored what cash sources are available in those communities.
According to an international survey by virtual office provider Regus, only 55% of companies with existing disaster recover plans could be operational within one hour of an interruption and just 45% would be able to secure an alternative workspace in the same time frame.
There is certainly a cost to being prepared, and this cost increases in challenging environments. With an annual operating expense of $265 dollars per member, Credit Union 1 spends more per member on average than its asset-based peers across the United States. However, it still spends slightly less than the average Alaskan competitor.
Take Off The Training Wheels
Perhaps the most critical, and one of the most difficult to evaluate, portions of a business continuity strategy is the people. However, Credit Union 1’s structure allows it to test the leadership and problem-solving capabilities of its employees long before an emergency scenario arises.
Headquarters is there to support the branches, but we can’t always be hands-on, Ellis says. Managers and senior staff have to be able to operate independently and, while following standard operating procedures, solve their own problems.
Overcoming these challenges often leads to increased confidence and personal growth, which can drive future success in all areas of performance.
This holds true for Credit Union 1’s 294 full-time employees. Its employees are slightly better compensated than its asset-based peer group, but they also generate approximately $370,000 more in loans per employee than similar-sized institutions.