Credit unions continue to experience tight margins due to many factors, including low interest rates, a flattening of the yield curve, growth of share accounts, shrinking loan portfolios and a shift in balance sheet structures. Even with a recent uptick in net interest margin for the overall credit union industry (up to 3 percent for Q1 2017), credit unions continue to operate in a historically low NIM environment. As net interest margin typically represents 50 to 85 percent of an institution’s bottom-line income, finance teams need an accurate and consistent methodology for calculating and analyzing NIM to truly measure profitability and performance. Although credit union mission statements are geared toward serving members, profitability is nonetheless an important factor in determining institutional health and viability and needs to be considered strategically in your organization.
In an environment of tight margins, employing matched-term funds transfer pricing as a tool for proactive margin management provides an opportunity to improve bottom-line results. Funds transfer pricing is an internal management information system designed to allocate NIM across all segments of the credit union, including branches, products and members. FTP is often used for historical analysis and measurement, but should also be an integral part of strategic planning, budgeting and forecasting to ensure alignment with organizational goals and strategies. Let’s examine the use of FTP throughout the enterprise performance management cycle.
continue reading »