Simple but effective: 4 Ways to improve your credit union

by Deborah L. Rightmire, Texas Credit Union League

Many credit union professionals hear the term “asset/liability management” and they think of interest rate risk. Even though interest rate risk is an important piece of the ALM puzzle, if fundamental decisions are not sound, the credit union’s future is in jeopardy.

Below are four simple suggestions for improving your credit union’s future.

1.  Know the source of your deposits – NCUA Letter 01-CU-08 suggests that some credit unions may be too reliant on rate sensitive liability sources such as money market shares, non-member deposits, borrowed money, and share certificates.  Take a moment to divide the balances of each by total assets. Combine the ratios to determine the percentage of funds coming from volatile sources. The higher the reliance, the greater the level of interest rate-risk. The credit union can either reduce the dollars in these categories or increase core deposits such as shares and drafts to reduce percentages of volatile sources.
2. Know the source of your loans – Divide each loan type by total loans. In what category do most of your loans reside?  Could you increase loan volume or yield by changing your credit union’s marketing strategy? Increasing used auto loans improves volume and yield using collateral with low risk. While having a higher risk, credit card loans also increase both volume and yield. Whether used as a marketing tool or a management tool, knowing the breakdown of your credit union’s loan portfolio can help increase credit union earnings.
3.  “Substantial” penalty for early withdrawal – Most credit unions have kept the 90 day or 180 day penalties when issuing member certificates regardless of initial term. While interest rates are low, this may not be a concern. However, when interest rates rise, a small penalty may encourage members to cash in their certificates and renew at the higher rates. CDs are designed to help credit unions control their cost of funds. Early withdrawal and renewal at higher rates do not support this goal.
4. Excessive liquidity reduces income – Like members, many credit unions are keeping investment amounts in short term or overnight accounts in anticipation of a rising market. This strategy reduces investment income. The difference between short and long term rates is small but every basis point gained by extending maturities goes directly to the bottom line. Use the three Ms of liquidity – monitor, manage, maximize – to increase investment income in spite of the low rate environment.

Simple decisions sometimes make the biggest impact. This isn’t rocket science. These four ideas, though simple, can have a major effect on your credit union’s ability to maintain future earnings.