Recession-Proof Your CU

Whether the economy will be hit with a recession is anyone’s guess and beyond anyone’s control. But what credit unions can control is how they prepare for the next economic downturn. Moreover, helping members get ready for a recession (or survive it when it comes) may help solidify relationships with them and perhaps even impress potential members credit unions are trying to attract. And even if an economic slump never comes, all that prep work can strengthen a cooperative’s competitive position.

Though every recession – generally defined as two or more quarters of negative economic growth – is different, they all share the same down trends such as business contractions, job losses, lower wages and less consumer spending, which essentially drives the economy.

While it seems counterintuitive, when credit unions prepare for an economic pull back, they still manage to move forward and grow, according to research conducted by the Filene Research Institute in Madison, Wis., and other organizations such as the Harvard Business Review and McKinsey & Co.

Filene researchers Taylor Nelms and George Hofheimer hosted a webinar in November that reviewed nine of the institute’s reports detailing how credit unions survived past recessions, how those insights can help credit unions survive the next recession before it arrives and what to do during the course of the economic doldrums.

“First, it’s best not to wait. One should act now,” Nelms, Filene’s senior director of research, said. “Preparing for a recession means planning and taking action ahead of the downturn. This means going on offense, taking steps to not just be defensive and reactive to changes in the economy but to actually be proactive, to grow through the downturn.”

In addition to looking internally to make strategic cost reductions that will not impede but rather improve operations and staff productivity, cutting debt is critically important for organizations to remain resilient during a slowdown.

“A lot of the ways commercial organizations create debt flexibilities is by cutting costs and reducing debt before the economic downturn rather than during it,” Hofheimer said. “It provides them that flexibility to react to new situations.”

Indeed, an analysis in the Harvard Business Review showed how resilient companies outperformed non-resilient companies during the Great Recession of 2007 to 2009.

“By the time the economy was in full-on recession, the resilients had reduced their debt by more than $1 for every $1 of total capital on their balance sheet,” according to the analysis published last year. “By contrast, non-resilient companies had added more than $3 of debt. The resilient companies accomplished this partly by divesting businesses and other assets more often than industry peers did.”

“One of the research projects we did after the financial crisis of 2007 was to examine and look back at credit unions that did an exceptional job as measured by growth in their consumer lending portfolios during that time period,” Hofheimer explained. “What we discovered was that there was a cohort of credit unions that grew pretty tremendously. This is organic growth – this is not through mergers during that timeframe. We measured that [growth] as more than 5% annually, which folks who have lived through that time period realize was a fairly high metric to achieve.”

In addition to analyzing their financial performance, Filene researchers asked executives a simple question: How did you do it?

“One was just focusing on [their] bread and butter, the best consumer lending products [they had], and focusing on those,” Hofheimer said. “So in a time of scarcity, focusing on the things that you’re good at is always good advice.”

During a recession, your competitors, particularly your big competitors, are more likely to pull back, which can give you the opportunity to gain market share.

“The ability for you to take some market share and market power during downturns is one thing that should not be discounted,” he explained. “If you look back to credit union market share before and after the financial crisis, especially in the mortgage market, it’s many times what it was before the financial crisis. That was one product area, which at the time may have seemed like a very high-risk product, but credit unions with their deep knowledge of the markets that they served were able to be quite successful.”

Credit unions also may want to strengthen other loan products and perhaps even consider launching new loan lines to help their members.

“In the past recession, it was all about refinancing mortgages,” Taylor said. “We don’t know what product lines may be most impacted during the next downturn, but I think that we have some pretty good ideas of where household debt has moved in the past 10 or so years. It may be refinancing across multiple loan types, so not just mortgages – think about student debt and credit cards. Those are some of the areas where consumers may struggle and where you may have opportunities.”

What’s more, credit unions that offered higher rates on deposits over competitors or benchmarks, provided a larger portfolio of loan products and increased marketing investments from 1979 to 2016 saw higher asset growth, according to an analysis conducted by Filene Economist Luis Dopico. Within those 37 years there were five recessions.

“A 10 basis point increase in marketing expenses on average leads to 79 basis points in asset growth,” Hofheimer said. “That’s a relationship that is a very small type of expense and can lead to oversized effects in terms of asset growth.”

Although members’ incomes, in general, have grown faster than the cost of living over the past 10 years, their debt, including auto loans, student loans and credit cards, continues to rise, according to a study of U.S. household debt by NerdWallet released last month.

Credit card debt has increased by 6% in the last year and more than 34% over the past five years. Total student loan debt stands at $1.5 trillion, or $46,822 per household, which is second only to mortgage debt at $9.4 trillion or $189,586 average per household. NerdWallet also found that over the past 10 years medical expenses have soared 33%, compared to median income growth of 30%.

Particularly for members who may lose their jobs during the next downturn, some may be unable to make loan payments. What is also concerning is that consumer surveys have shown most Americans are living paycheck to paycheck and more than 40% would not be able to cover a $400 emergency expense.

A key finding from a DepositAccounts survey released in December showed more than half of consumers, including those making more than $100,000 annually, fear a recession will destroy their finances. What’s more, 25% of survey respondents, including 37% of millennials and 24% of Gen Xers, plan to withdraw funds from their deposit accounts to prepare for the next recession, a trend that could prove problematic for all financial institutions.

To allay member fears, credit unions should leverage their financial expertise to explain what practical steps members can take to prepare for the next recession and regularly deliver those messages via website blogs, videos, social media channels and even marketing campaigns, as consumers are always searching for reliable information and advice that can improve their lives.

The $4.3 billion Landmark Credit Union in New Berlin, Wis., for example, published a blog post last October providing members with ideas on how to prepare for a possible economic slump by focusing on paying off high-interest debt, building up an emergency fund, living below their means and figuring out how to reduce household expenses. In another blog post, John Holt, president/CEO of the $446 million Nutmeg State Financial Credit Union, explained how members can take advantage of financial products offered by the Rocky Hill, Conn.-based credit union to reduce monthly expenses, cut credit card expenses and save more money.

“We know from recent experience the dramatic impact that a downturn can have on people’s financial well-being,” Nelms said. “Whether that’s through unemployment, increased debt or cash flow volatility, it makes a lot of sense for credit unions to focus on their members in advance and during a downturn because that focus will reward the cooperative through increased member loyalty and engagement.”