Effects of the Economy on Credit Unions

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An operating environment resulting from slow growth in the economy, low interest rates, and nagging unemployment has from a macro-perspective produced an outcome of rapid savings growth, slow loan growth, and a steep yield curve.

We have seen:

  • Declining yield on assets due to lower interest rates plus the asset distribution shifting to lower-rate investments and maturing loans being replaced with low rate loans;
  • Declining cost of funds due to lower dividend rates plus the distribution of savings shifting to low-cost savings products;
  • Indeterminate net interest margin due to cost of funds falling faster than yield on assets if dividend rates are aggressively lowered.  However, if loan growth is very weak and savings growth very strong, yield on assets may fall faster than cost of funds;
  • Rising provisions for loan loss due to higher bankruptcies and charge-offs reflecting employment trends;
  • Lower operating expense to average asset ratio due to rapid savings growth increasing assets faster than the growth in operating expenses;
  • Higher fee income due to non-sufficient funds and late payments.
  • Return on assets will be flat to marginally lower; and
  • Capital-to-assets will be flat to marginally higher.

Things to consider in maintaining net income when interest rates are very low are listed below:

  • Avoid extending investment maturities significantly;
  • Limit additions to the fixed rate mortgage portfolio;
  • Don’t overreact by slashing operating expenses; and
  • Adjust rate paid on member savings downward.

Some factors to consider with respect to falling net worth ratios are as follows:

  • Members are seeking a safe place to store their financial assets (asset growth has been strong);
  • If rates paid on savings are not hyper-competitive, this savings growth can be healthy.

This blog entry you have just read was written by Edward Lis who is a former senior executive of three different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com or by calling 518-420-2108.

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Credit Union Mergers

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Back in the late 1970s there were approximately 20,000 federally insured credit unions in the US.  Fast forward to today and the number is down to less than 7,700 credit unions.

Our industry faces many challenges moving forward in the form of rising competition, new imposed regulations, as well as the long-term corporate stabilization and special NCUSIF premiums, a decrease in loan origination, increase deposit growth, low yielding investments prospects, and tighter margins. Collectively, these challenges have tempered growth opportunities for many credit unions.  Many are looking to the prospect of mergers as a means of building asset size, adding members, increasing net worth and/or expanding market share.  Mergers enable credit unions to increase their geographical footprint, enhance their technological capabilities, build their branch infrastructure or solve human resource challenges such as management succession issues.

Whether your the acquiring (acquirer) credit union or the one being acquired (acquiree) having a well-respected and knowledgeable credit union advocate and leader to assist in evaluating and acting upon one of the most important transactions that a credit union may consider-a merger with another credit union- is in the best interests of the credit union membership.  A merger has a life of its own; it contains a cycle from inception through “closing the deal” and the actual merging of the credit unions.

A merger can also be a tremendously emotional experience for volunteers, employees and members of a credit union.

Clearly, if considering a merger one may need to balance a number of competing interests as you begin the journey and undertake in determining whether to proceed with a merger opportunity.

I can assist the existing management and board in the determining the future of the credit union. If a decision to merge is made retaining outside assistance is highly recommended as this person can further provide guidance during the steps in the “life cycle” that the organization may encounter through the merger process and to raise pertinent legal, regulatory, accounting, and business issues that you may wish to consider in your credit union’s journey through the merger process.

This blog entry you have just read was written by Edward Lis who is a former senior executive of three different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com or by calling 518-420-2108.

Key Ratios

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Key ratios are relatively unimportant in isolation. Board members should monitor trends (e.g., ratio this month compared to same month last year) & compare your ratios to peer averages or another type of benchmark (i.e., ratio compared to other credit unions with similar characteristics).
The following 8 key ratios will give you a very good picture of your credit union’s performance.

Net Economic Value

Capital/Assets Ratio

Return on Assets (ROA)

Loan to Share Ratio

Net Expense to Assets Ratio

Delinquency Ratio

Loan Charge-off Ratio

Checking Accounts to Members Ratio

This blog entry you have just read was written by Edward Lis who is a former senior executive of three different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com or by calling 518-420-2108.

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3rd Party Due Diligence

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To expand their services and product offerings, credit unions are increasingly outsourcing functions and programs through collaboration with third parties.  Third party relationships are essential and can enable credit unions to become their members’ primary financial institution.  That said, not managing and controlling these relationships can result in unanticipated costs, legal disputes, and financial loss.
The regulators goal is to ensure credit unions clearly understand the risk they are assuming and balance and control these risks considering the credit union’s safety and members’ best interests.

The vendor due diligence objectives for credit unions are to:

  • Ensure that outsourced relationships are initiated based on a sound business case and comprehensive due diligence in the selection process.
  • Ensure that outsourced relationships are effectively managed by providing for consistent, risk focused controls and processes.
  • Ensure that the credit union is in compliance with regulatory guidance and requirements pertaining to outsourced relationships.

Credit Unions can achieve these objectives by maintaining an active vendor management oversight function.  Specific practices should be supported by guidelines and checklists that ensure that vendor performance is monitored, contractual requirements are in place and regulatory requirements are met.

Herein is an overview of the key areas when developing a vendor due diligence program in your credit union:

  • Identifying key vendors and their risk levels;
  • Gathering information for due diligence reviews;
  • Conducting initial and ongoing reviews;
  • Tracking and documenting; and
  • An in-house  compared to an outsourced programs.

This blog entry you have just read was written by Edward Lis who is a former senior executive of three different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com or by calling 518-420-2108.

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