Managing Liquidity Constraints at Small Credit Unions Part 1

[00:00:00] Tyler: We don’t want to be too high for too long in a falling interest rate environment. and so we’re really focused on what are those costs today? What is projections? Where are the pricing models? And how do we make sure that we’re giving as much back  to our members through that pricing, also making sure that we’re making sound financial decisions to the credit union and at the same time growing deposits in order to grow?

[00:00:54] Vince:Welcome to this special multi episode series on 22 Minutes in Lending. I’m your host, Vince Passione.
[00:00:54] Vince: I’m pleased to welcome three credit union leaders helping shape financial services in their communities for this panel discussion.

[00:01:00] Vince: Joining us are Dee Edie, the president and CEO of Pine Bluff Cotton Belt FCU in Pine Bluff, Arkansas. Tanya Romero Sturgeon, the president and CEO of Guadalupe CU in Santa Fe, New Mexico. And Tyler Valentine, the president and CEO of StagePoint FCU in Laramie, Wyoming.

[00:01:18] Vince: Together, they’re going to share their experiences, strategies, and visions for the future.

[00:01:23] Vince: Offering what I believe to be a very unique glimpse into smaller credit unions and the critical role that they play in fostering financial well being in their communities.

[00:01:31] Vince: Welcome everyone and thank you for joining us today.

[00:01:34] Tanya: Hi, pleased to be here.

[00:01:36] Dee: glad to be here.

[00:01:37] Vince: so it’s been a pretty turbulent 18 months and we’ve seen some serious economic headwinds. We had record inflation. We had record federal rate heights and credit unions ended 2023 at an 86. 5 loan to share ratio, creating some serious liquidity concerns, both for the CEOs and I’m sure your boards. So let’s start with you first, Tanya.

[00:01:57] Vince: So you assumed the role of CEO in October  last year, you’ve been at Guadalupe for about 20 years. Yeah.

[00:02:03] Vince: On your role as CEO,  you kind of looked ahead when  you’re at COO working on the transition plan. So. What did you do to get prepared for this kind of economic uncertainty and we saw on full last year?

[00:02:15] Tanya: We had some great succession planning with my predecessor, Winona Nava. We worked for a very long time, even prior to knowing her retirement, she worked with our full management team to provide us education during planning session, during management meetings. any opportunity we had to learn what was going on in our economy, and we would have a lot of collaborative discussions about what does that mean for our credit union, and we just always  make sure that we keep in mind, you know, who we are, who we’re here to serve.

[00:02:49] Tanya: You know, making sure that our mission and vision guide us in our decisioning and how we implement products and services and any strategy that we do. And so during our succession planning, Winona really made sure that I understood all of those processes,  you know, which I was very grateful for. that really intense, training that we had for so long, prior to her retirement.

[00:03:13] Vince: Well, great. Let’s move to Tyler. So Tyler, you took on your first year role in 2008. So were there any lessons that you learned during your tenure
that prepared you for what happened in the last 18 months?

[00:03:26] Tyler: yeah, and I think there’s a lot that goes into this when it comes to,the lessons learned from 2008 and then, yeah, the, you know,  pandemic and I think we’re going through once in a, generation.

[00:03:39] Tyler: Financial crisis every two or three years is kind of how it feels like since I became CEO. and I think every time we have one of these events, it’s really about learning from that situation and what do you take forward?

[00:03:51] Tyler: I think what we’ve really. Drilled down on is really being there for our members, making sure we have all of the options, really coaching our desk solutions team to make sure that, they’re offering those options and those people that are. Responding to us and talking to us that we’re putting everything on the table and making sure that we can get people through.

[00:04:11] Tyler: These crises at different moments,  the underwriting side, it’s a little bit different to what we don’t want to do is pull back too far just because the economy has, turned,or isn’t as good because then you’re disenfranchising those people that might be shopping or looking during that period of time.

[00:04:29] Tyler: And it also affects our community through our business partners. So we do a lot of indirect lending. We have a lot of really deep relationships with our dealers. and if We step away from, doing some of those loans during those downtimes, that’s less vehicles that are sold.

[00:04:42] Tyler: That’s less income in our community.it’s less upward mobility. Maybe those people that are buying those need those cars to get to work. so it’s really important to us that we’re not reactionary, that we’re really strategic, what we had done before we continued to do, maybe there’s not, maybe we, Soften something or reimagine it differently, but that we don’t just step away from a product  line that could adversely impact our community and our members and those potential members through that indirect channel.

[00:05:11] Vince: So Tyler, was there any point in time during the last 18 months when you, like,  for example, indirect auto, pretty difficult product to the time like this. And especially when you look at things like, well, there was a loan to value when you look at residual values, right? Of some of these used vehicles, especially where,I think prior to the pandemic and during the pandemic, you probably saw like a 42 percent increase in the cost of a used vehicle. thoughts around that when you were just continuing to forge ahead, that’s going to be difficult to do when you’re thinking about how that might affect. Your ability, if there, you have to repossess these vehicles or?

[00:05:48] Tyler: Yeah. And we have seen , those used vehicle prices come down about half the amount that they appreciated, right? So they’re down about 21 percent over where we were. And so we are seeing it as we have collections and charge us and things like that. But we knew that was going to happen. We could see it, right? I mean, you can’t have record levels of appreciation happen, and not have some level of understanding that’s temporary and that it’s going to come down. So what we tried to do was just be really judicious in how we underwrote those loans that You know, maybe if we would normally be 130 percent loan value on an A plus borrower, we’re backing some of that down.

[00:06:24] Tyler: We’re maybe not being as aggressive on loan to value when it comes to our non prime lending. so it’s massaging it to match the situation, but it’s not stepping completely out of the space. and It’s recognizing when you know, the camper side of it, we do a lot of recreational vehicle loans and power sport as well.

[00:06:44] Tyler: And so we knew COVID campers were a thing, people were camping in our area,buying a lot of those campers. And we did a lot of financing in those campers. We knew that as those loans sat there and people will. Maybe no longer we’re going  camping because now they’re doing their traditional family vacations.

[00:07:03] Tyler: We were going to have some of those campers go back. We priced for that upfront. We knew we needed a return on those. So we were, our effect did yield on that portfolio was over 7 percent all the way through the pandemic. So the money that we’ve made throughout course of these years on those loans. We knew was going to be needed if we had losses, which we experienced some of those as we’ve gone through 2023.

[00:07:28] Tyler: People just deciding it’s not what they need. Inflation hitting their pocketbooks, their toys, and their campers are often the first things that go. And so we’ve seen some of that, but we knew it would be there, planned for it, put money aside for it.  We have a strategic initiative around how we were going to lend on that type of collateral and what the possible  ramifications, the worst case scenario could be as we move through, you know, kind of the maturity or the seasoning on those loans.

[00:07:58] Tanya: So at Guadalupe Credit Union, we did see an increase of lending for recreational vehicles during COVID.

[00:08:06] Tanya: Although we have not yet seen a big, delinquency increase on that particular product line. so we’ve been in a good situation so far with that and, the rise of lending on recreational vehicles has already gone back downward to a more average level for us. And so that’s what we’ve been seeing as a result of a lot of people wanting to go camping , in the rural areas during the COVID time.

[00:09:17] Vince: So Dee, pine bluff, very engaged, very meshed in your community. And when the financial institutions under stress, it has a knock on effect in the community. So in your community, we talked about the other day, right? There’s big challenges here, right? High rates of poverty, low average income.

[00:09:34] Vince: So talk to us a little about where Cotton Belt’s been focusing to try to drive the most value in the community.

[00:09:40] Dee: Well, what we had to do was to become a CDFI first, so that we could obtain some grant money to help us in the community. Because as a credit union, we only focus

[00:09:55] on who we’re serving. We’re in a rural area.

[00:09:59] Dee: This town used to be 60, 000 people. Within about 10 years, it dropped to 30, 000 people.

[00:10:07] Dee: We’re quite rural around us, and that really impacts

[00:10:11] Dee: What people need.

[00:10:13] Dee: So our emphasis has been based on the grants that we’ve received is to give loans to those who can’t get it anywhere else. that’s really our clientele.

[00:10:25] Dee: We try to put these renters into homes. We’ve had many members who are in their 60s who’ve never owned a home.

[00:10:35] Dee: And they may buy a $50,000 house, but we’ve helped them with that.

[00:10:40] Dee: And, it’s quite amazing when you help people in that area, I think, become homeowners. There’s a sense of pride that goes to them that they’ve never been able to have.

[00:10:53] Dee: And we’re in an area where they spend a lot on vehicles, but everything else is not near as important.

[00:11:02] Dee: So, I think we’ve really had to help those with low income and poverty, but we’ve done it through education.

[00:11:10] Dee: Working with the head counselor and we’re all becoming certified financial counselors in our offices. So all those things are helping because of education.

[00:11:23] Vince: Amazing. We’re going to get back to the CDFI piece in a minute. I want to just touch on liquidity. So obviously we talked about it earlier. You know, in the fourth quarter, we saw that the, of 2023, most credit unions, the average loan to share ratio was about 86 and a half percent. We haven’t seen that in probably two decades.

[00:11:43] Vince: So we’ll start with you, Tanya, any changes in the balance sheet and funding in order to deal with liquidity constraints?

[00:11:51] Tanya: We actually had a really interesting strategy to help with liquidity issues and it involved working with a partner.

[00:12:00] Tanya: As we CDF I credit union and We were at an inclusive conference when we met a vendor named CINO and CINO helped us to find non member deposits that came in at our standard CD rate and it was perfect timing for us to bring in some much needed deposit growth at low cost.

[00:12:25] Tanya: And so that was a fantastic strategy that worked quite well for us.

[00:12:30] Vince: And you said it was at your CD rates time. So what was the cost of funds for you?

[00:12:36] Tanya: Well, what they did was they brought in the money and put it into an account atblike a 24 month CD.

[00:12:44] Tanya: So it was a CD and, they are earning the dividends of the same interest rate that all of our members would earn. And so they weren’t asking for anything special, any higher rate. what happens is they find companies that want to invest in, you know, they want to be able to say, like, I, hey, we helped, members of impoverished counties or we helped,

[00:13:07] Tanya: A credit union, build these products or services, you know, by bringing their deposits into our credit union, they helped us do what we do.

[00:13:16] Tanya: And so they get to be a part of that. And that was kind of their cost. our cost, for bringing in their deposits was just being. attached to what we do and who we serve.

[00:13:28] Tanya: yeah,so it was a really great. I mean, it didn’t cost us anything to bring it in, but the dividends, like I said, it’s the same rate.

[00:13:35] Tanya: They didn’t want anything special. So it was a really great deal. and to bring in the funds and we know we had to work out with him how much we were looking for. It didn’t all come in at one  time. It was spread out, but it worked out very perfect.

[00:13:49] Vince: And D what about you, anything on the broker deposit side or federal home loan bank? How did you deal with liquidity?

[00:13:56] Dee: I’m feeling without liquidity to be honest,and there’s been some participation that would have loved to purchase, but didn’t have the money for. I’ve gotten over 5 million in grant money, and we’ve been able to put that out in loans. We all go make sure.

[00:14:13] Dee: That the loans are, repayable, that people can afford the payment and that sort of thing.

[00:14:20] Dee: We’re underwriting well, so we’re keeping the money cycling, but also have a healthy line of credit with county. I would lend the fund that, Tanya’s using,

[00:14:31] Tanya: We can share contact information.

[00:14:34] Dee: right here.

[00:14:35] Vince: and Tyler, how about your credit union? What about liquidity there and how’d you manage through it been tight and we’re really used to it. So we pre COVID we’re running. 92 to 97 percent loan to share ratio.

[00:14:49] Tyler: So we’re really used to having tight liquidity. I always tell my team we’re a credit union. We’re not a savings union. Our job, the highest best of our members. Funds is out in loans in our community to those people that need them. So,were definitely a lending institution. We  focus on that liquidity definitely was a challenge for us this year. We did do some non member deposits. We use a platform called raisin. That brought in non member deposits , you know, around the country and, put that money on deposit with us.

[00:15:21] Tyler: It’s higher cost money than, you know, what we might have in our shop, but it was needed to maintain some of the liquidity measurements that we see. We have access to more non member deposits should we need it. We also have a line of credit with corporate credit unions and an available line of credit through the federal online bank.

[00:15:37] Tyler: So. We have a lot of liquidity sourcesout there. We’re also a member of the CLS through NCUA.

[00:15:42] Tyler: So lots ofbackup liquidity sources. I think what’s important for us to recognize as we, and what we’re really focused on from a strategy perspective around liquidity is we have a. Chief lending officer, but not necessarily a cheap audit officer, right?

[00:15:58] Tyler: We have a cheap operations officer, but her focus is much broader than the narrower scope in lending. And so we have to be as strategic on the deposit side as we are on the lending side. And I think this year, as we look at how we’re going through deposits  in order to grow loans, we’re really focused on how to be, price.

[00:16:23] Tyler: At the right point, especially with the prospect of falling interest rates. We don’t want to be too high for too long in a falling interest rate environment. and so we’re really focused on what are those costs today? What is projections? Where are the pricing models? And how do  we make sure that we’re giving as much back to our members through that pricing but also making sure that we’re making sound financial decisions to the credit union and at the same time growing deposits in order to grow?

[00:16:49] Vince: So you touched on deposits and there’s been lots of conversations in recent conferences about, you know deposit betas and how quickly, right, credit unions had to raise rates. Probably the first time in decades that credit unions had to raise rates as rapidly as you all had to do.

[00:17:06] Vince: And there’s been discussions about raising rates across all of the deposit products that, you know, some of your clients are sticky and they don’t expect the rate raise. They’d love it, but they don’t expect it.

[00:17:16] Vince: You, we see some credit unions offer things like a checking account, but if you bring a new deposit, we’ll offer you a higher rate on that.

[00:17:25] Vince: Any of you deploying those kinds of strategies,

[00:17:28] Dee: I have tried that, in all honesty, and I think like every member has a little money setting in their account here that they want that same rate for. And I don’t want to lose our core members. So, yes, we end up giving them that higher rate. So, all it’s done for us is raise our cost of funds.

[00:17:50] Vince: right?

[00:17:51] Dee: That happens, which.you know, you bring in some new money, but most of the time in our situation. It’s our current membership.

[00:17:58] Vince: Those direct deposit customers are very sticky, right?

[00:18:01] Dee: Yes, and I appreciate that.

[00:18:04] Vince: So

[00:18:06] Tyler: yeah, , we’ve had a rewards checking account for a long time and I, we’re looking now, at adding tiers to that rewards checking account.

[00:18:15] Tyler: So right now it’s capped at 15, 000, you know, so they earn 2 percent on their money if they do all things needed in order to get that 2 percent rate. but at 15, 000 then that rate stops.

[00:18:27] Tyler: And so we’re looking at adding, you know, a tier or two above that in order to have people.

[00:18:35] Tyler: If they’re sitting on liquid money that they’re going to sit on it in their checking account with us and that they have  to do the 20 debit card transactions that have direct deposit, have home banking and have e statements, all of those things that save us money, but also aggregating some of those balances into checking accounts as we’ve seen kind of the cannibalization of some of the checking account funds that have been sitting for a long time, move into money market accounts or move into CD accounts.

[00:19:01] Tyler: but it popped our cost of funds. And so if we can hold  some of those funds into those core deposits, even at higher rates, the requirements that they’re doing these other things also helps offset some of those costs.

[00:19:14] Vince: So both Pine Bluff and Guadalupe are both CDFIs. ,

[00:19:18] Vince: so Tanya, how long ago did you become community development financial institution? And then when you think about the benefits, right? The grants and, excess capital, whether it was, sub debt or

[00:19:31] Vince: EQ2, can you talk a little bit about how the journey,the benefits to you and how it positions you  in the community?

[00:19:37] Tanya: we’ve been a CDFI. I, would say we’ve been a CDFI. Longer than we had the designation, we didn’t know we were operating as a CDFI. , our previous CEO had met with, someone from inclusive who was like learning about our credit union and said, you know, Hey, you guys are already a CDFI. And so he encouraged us to apply for that and a certification.

[00:20:02] Tanya: And we did. 15 ish years ago and so it has helped us really, it has opened the doors to a lot of grant funding. With the CDF grant in that time frame, we’ve received a little  over 7. 7 million in grant funds that we’re able to turn back into our community, in terms of lending funds.

[00:20:25] Tanya: And so it’s been a really great journey.

[00:20:27] Tanya: It helps open the doors to, More products and services that might be, you know, we could take on a little more risk than we might otherwise, because we have this grant that it can be applied towards loan loss reserves, for example.

[00:20:42] Tanya: So it helps you to, want to take on more risk and more, types of borrowers.

[00:20:48] Tanya: You know, we can do more programs with it.

[00:20:51] Tanya: We’ve been able to, bring in more staff. Dee was talking about certified financial counselors, which  we also have, we do have seven of them dedicated, like that’s their full role versus hybrid, like

[00:21:05] Tanya: I open accounts and I also coach you, you know, so, we’ve been able to do all of these things, these creative products and services take on more risk and have this department, thanks to, these grant funds that we’ve received with this certification.
[00:21:19] Vince: No, that’s great.

[00:21:21] Vince: And D, how long ago did you become a CDFI and, talk a little bit about the way you use the funds and whether or not you were able to access additional capital?

[00:21:30] Dee: we became a CDFI about 5 years ago now, and the 1st grant opportunity we actually passed on, pardon 1st, but 2nd, but 2nd, Because we had just received a large one, we didn’t feel we could manage it well. So, we kind of pick and choose based on if it’s a fit for us. we’re using a lot of the money not only for lending,

[00:21:58] Dee: but secondly, for  new, digital products, for instance, different things that we need to be able to advance the credit union, we can get the money from a financial assistance grant.
[00:22:11] Dee: And so that has helped us tremendously the I came here was pretty, not advanced on any of those things.

[00:22:19] Dee: And so  what we’ve done is try to get in to the century we’re  living in, to be, to put it that way, I guess, and add those products that people want. So, we’re hemming in to all these projects.

[00:22:35] Tyler: sorry to jump in, I just had a question for either or both around  CDFI and did the uncertainty that exists, the continued funding, because I’m not a CDFI, we’re low income designated, but not a CDFI, what are your thoughts around that and, and are you worried that, that could One day no longer be there to offer at least products and services to your membership.

[00:22:59] Dee: I’m expecting that, you know, honestly. all it’s going to take is an administrative change and,  I think that will happen. In the meantime, I’ve been able to get a lot of people in homes that wouldn’t have had that opportunity otherwise. And that’s the kind of thing, the kind of lending we’ve always done.

[00:23:21] Dee: My opinion says that, you know, they’ve already been a community.

[00:23:27] Dee: This just gives them additional funds to do so.

[00:23:31] Dee: And so I’m just capitalizing on the administration we’ve got up there now.

[00:23:37] Dee: But I fully expect that mine could change and be very different. previous administration,

[00:23:45] Dee: was not this generous.

[00:23:48] Dee: So that’s what I expect again.

[00:23:50] Vince: I believe the CDFI certifications have this sort of a pause, right? Is that, is that right?

[00:23:56] Dee: They did, we’ve all had to re certify, we’re working on re certifications as we speak.

[00:24:03] Tanya: Yeah, some of the rules for how you get certified are being amended, or some of the rules that they were wanting to implement didn’t go through yet, but, like a little more, tight process to in terms of qualifying someone as a CDFI. So I guess I would say it’s probably good intention, but it’s been a process.

[00:24:25] Vince: So that wraps our first episode in our series with Dee, Tanya, and Tyler.

[00:24:31] Vince: Stay tuned to hear more about challenges Small credit unions are facing in part two. Thank you to everyone for tuning in and remember to hit the subscribe button so you don’t miss the next episode in this series, I’ll meet you right here, back at the continuation of this special 22 minutes and lending panel discussion.