As interest rates have been at historic lows for a prolonged period of time, credit unions have had the benefit of lowering their cost of funds (COF) as loan and investment yields decline. Many seem to have worked through their credit issues and, at least for now, have been able to reduce their provision for loan losses (PLL)—another counter-balance to declining asset yields.
Unfortunately, for many, the COF and PLL have—or will soon—hit a floor while asset yields continue to decline. Some have turned to longer-term assets, such as mortgages, mortgage investments and callable bonds to help current earnings. However, these options add interest rate risk in a rising rate environment.
Others have found sustainable profitability by counting the right business, every day. They are looking inward at their business models and practices for opportunities to sustainably improve ROA, no matter the rate environment. They recognize that while they exist for their members, they also have to run the credit union like a business in order to improve its viability and relevance in the longer term for those very members.
To do this, they recognize that they have to break away from the conventional wisdom of focusing mostly on member growth, asset growth and products per member. They are drilling down as they ask a different set of questions in which the answers can reveal eye-opening decision information.continue reading »