The Value of Being Prepared

No financial institution is confidently prepared for a predicted economic contraction, but some credit unions are happy to be heading into it in a position of strength. 

That seems to be the case at $16.7 billion Servus Credit Union in Edmonton, Alberta, which recorded record profits in 2019. 

“In Alberta, we’re dealing with the oil price collapse as well as COVID,” says CFO Ryan Gobolos. “We were disciplined in good times, building sustainable profits, and that should help us get through hard times.”

Those profits are partly sustainable because Servus CU hedged against a fall in interest rates. “We didn’t see this coming, but we put together a comprehensive hedging program for the 2020 fiscal year, and it’s paying off now,” he says. “We were buffered against a big decline in interest rates.” The credit union hedged for a 1% drop, and the drop it experienced was around 1.5%, so the CU’s exposure wasn’t fully protected, but enough to “save a lot of our margin revenue and put us close to what we had budgeted,” Gobolos reports.

Deposits are up. “We offered deferrals, so some members are building up their cash positions. And they’re spending less,” Gobolos explains. That’s also evident in the credit card portfolio, where spending is down and so are outstanding balances. Loan growth has stalled. Delinquencies are up only a little. That’s partly because the deferrals and large government mitigation programs are working, he suggests.

But harder times may be coming, and Servus CU had to wrestle with the size of its loan loss reserve in the second quarter, increasing it by just over 30%. 

“That was an interesting exercise because you have to base your expected credit losses on forward-looking modeling. We were conservative and weighted the model more on the down side,” he reports. With liquidity up, loan growth down and a larger-than-normal investment portfolio, Servus CU is staying conservative and short. cues icon

Richard H. Gamble writes from Grand Junction, Colorado.