Retain your

profitability

in a low

interest rate

environment

If your profitability is shrinking by the minute, take heart; you are not alone. This prolonged low interest rate environment is taking its toll on many credit unions. It’s up to each credit union to look for innovative ways to bolster that shrinking bottom line. Negative earnings are NOT acceptable in the long run. Here are a few tips to help you cope:

Remove barriers. To increase your earnings, you need to increase business. And that means removing obstacles that deter members from using you. For instance, you might want to reconsider a policy that requires a 10-20 percent down-payment on vehicle loans. If it takes you more than one day to take the application, approve the loan and disburse the funds, revamp your process until you are giving quality, turnaround service. Don’t make members jump through hoops. Loans are too easy to come by these days, and you won’t get a second chance. Look for reasons to approve the loan, then make it easy!

Price loans to maximize income. Consider switching to risk-based pricing to more effectively compete with your local competitors and to maximize your earnings. Failure to do so will drive your best borrowers away and leave you with only riskier borrowers, who will gravitate to your lower rates. A risk-based approach allows you to give your best borrowers your very best rates and pays you more for the risk you take on your C & D borrowers.

Offer home equity lines of credit. Offering HELOCs can increase your loan profitability. This convenient loan product, tied to prime, provides your members with the freedom to access loan funds at their convenience, while allowing you to place more loan funds.

Remove artificial loan limits. Are you limiting the dollar amount members can borrow against their home, such as a $20,000 maximum, or something similar? If a member has plenty of equity and can afford to make payments, why limit what he or she is able to borrow? Increasing the dollars you lend will help increase your loan to share ratio.

Bottom line: trust your members more. Increase the amounts they can borrow, offer more loan product options, switch to risk-based pricing and eliminate vehicle down-payment requirements. Every time you say “no,” you’re limiting your income potential.

From WCUL News, a monthly publication of the Wisconsin Credit Union League & Affiliates

Matz Proposes Small CU Initiative

National Credit Union Administration (NCUA) Board Member Debbie Matz announced Nov. 1st that she is proposing an agency-wide small credit union initiative. The initiative would reallocate resources within staff-recommended budget limits.

"This initiative will assist small credit unions which are at the forefront in serving people of modest means and are invaluable in preserving the tax exemption for all credit unions," Matz explained. "To some key lawmakers, small credit unions are the icon of the credit union movement. Their disappearance could threaten the tax exemption for all credit unions."

The Small Credit Union Initiative is intended as an acknowledgement from NCUA of the important role these institutions play in the lives of their members and communities. "We must do what we can to curb the loss of small credit unions," Matz urged.

"An effective Small Credit Union Initiative could be launched if the 2005 budget recommended by NCUA staff at our October public forum is adopted at our November Board meeting," Matz pointed out. "Without adding positions or dollars to the budget, this initiative would use existing resources and reallocate positions that have not been filled."

Specifically, under Matz's proposal: Two of five positions that were not filled after NCUA's regional realignment would be reallocated to NCUA's Office of Small CU Initiatives. In addition, NCUA's 15 Economic Development Specialists (EDSs), who are currently spread unevenly through the NCUA regions, would be centralized under the Office of Small CU Initiatives. With the remaining three positions that were not filled after the regional realignment, Matz recommends focusing on other emerging safety and soundness threats. For example:

Two of the positions could be reallocated to serve as Subject Matter Examiners (SMEs) in Specialized Lending. They could focus on examining indirect lending programs in regions where NCUA staff have identified particularly high indirect lending risks.

The final position could be reallocated to NCUA's Office of Corporate Credit Unions (OCCU). This would respond to the report released last month by the Government Accountability Office (GAO), which determined that OCCU will need greater resources to effectively examine corporate credit unions.

LOW INCOME DESIGNATION

If your credit union qualifies, consider obtaining a “low income” designation from the National Credit Union Administration (NCUA).  This would qualify your credit union for the below market rate loans and technical assistance grants provided through NCUA’s Revolving Loan Program and give you the ability to accept “non-member” deposits.  Funding for a student intern also is available.  A low income designated credit union can partner with another credit union in its area and hire a college student for the summer.  The intern, who must be majoring in business, marketing, or accounting, works at both credit unions.

To obtain the low income designation, a credit union must be able to show that a majority of its member households earn less than 80 percent of the national median household income.  Once designated, the credit union can accept non-member deposits from any source, usually from large credit unions, banks seeking Community Reinvestment Act credit, foundations, faith-based institutions, and other social investors.

Typically, a credit union uses the below market rate loans to meet the loan demand from its members.  Grants are usually used to purchase office equipment, provide salary assistance to hire qualified managers or train staffers and volunteers, and secure professional audits of financial records.  NCUA’s Office of Small CU Initiatives (703.518.6610) provides counseling and administers the Loan Program and can provide more information on how to apply.

Small-CU staff turnover plummets in 2003

MADISON, Wis. (11/18/04)--Credit union staff turnover rates--particularly for front-line personnel--are the lowest they have been in recent years, according to the latest Credit Union National Association (CUNA) survey. Overall full-time turnover or replacement rate of staff dropped to 13% in 2003 from 18% in 2002, according to the recently released 2004 Small Credit Union Staff Salary Survey. The survey, from CUNA's center for research and advice, is designed for use by credit unions under $20 million in assets.

Turnover of front-line staff (including tellers, member service representatives and cashiers) had stayed
fairly static at about 28% from 2000 to 2002. However, it plummeted to 18% in 2003. This figure is
even lower than the average front-line turnover rate of 22% among all credit unions with $1 million
or more in assets.

The survey analyzed full-time, front-line positions at small credit unions in 2003. Among its findings:

"Although the turnover and average pay increase rates have both declined in recent years, most likely as a result of the weak labor market and a struggling economy, credit unions will still need to keep an eye on current economic conditions," says Chad Thiele, CUNA senior research analyst. "As the economy strengthens, credit unions may need to bump up their salary budgets in order to retain their best employees."

In addition to base salaries and ranges, the report details the average incentives, bonuses, and total cash compensation for the 14 full-time positions most commonly found in small credit unions. It also includes hourly wage and variable-pay data for eight part-time positions.

Compared to CUNA's Complete Credit Union Staff Salary Survey, the Small Credit Union Survey includes a narrower asset-category breakdown and displays results organized by region, number of full-time employees, number of services offered, number of members, and by the total amount of loans outstanding at small credit unions. The report also includes job descriptions and salary adjustment worksheets and is available at a price affordable for small credit unions.

For more information or to order a PDF file of CUNA's 2004 Small Credit Union Staff Salary Survey online, visit advice.cuna.org and type stock #25733P in the search box.   To borrow this survey from the League’s lending library, contact Bernadette Hines @ 302.322.9341 or 800.292.7875 or Bernadette@dcul.org.

What Does “CAMEL” Mean?

This is a short explanation of CAMEL for those who wonder what the NCUA examiners are talking about but are afraid to ask.

The C stands for Capital, the reserves and undivided earnings that are held as back up in case your credit union has a bad year.  The rating for Capital is arrived at primarily by calculating four ratios that are based on the credit union’s financial information.  One of these ratios – Net Worth/Total Assets – is one of four important ratios called Key Ratios - and is also the ratio that triggers Prompt Corrective Action (PCA).

The A stands for Asset Quality, an evaluation of how good your loans and investments really are.  Five ratios are calculated when developing a rating.  Two of the Asset Quality ratios are Key Ratios - Delinquent Loans/Loans, and Net Charge Offs/Average Loans.

M is the tricky letter.  It stands for Management and, since it is not based on financial ratios, the examiner has some leeway in assigning a rating.  What does the examiner look at?  The primary areas are the credit union’s strategic plan and its one to two year business plan, information systems and technology, internal controls, and service to members.  In addition, compliance, management compensation, conflict of interest, and professional ethics and behavior are reviewed.

The next letter, E, stands for Earnings.  Ten ratios that analyze the credit union’s income and expenses are used to develop the rating.  One of the ratios, Return on Average Assets, is the fourth of the four Key Ratios.

At one time the L measured liquidity.  Now it stands for Asset/Liability Management.  Eight ratios that analyze the credit union’s Interest Rate Risk and its Liquidity Risk are used to develop a rating.

Put them all together and what do you have?  A lumpy horse with big feet that looks arrogant and spits –

The CAMEL!

Essentials is published periodically by:
The Delaware Credit Union League
4 Quigley Boulevard
New Castle, DE  19720
(302) 322-9341 or (800) 292-7875
Fax:  (302) 322-9354
Editor:  Jane Bailey
E-Mail:  jane@dcul.org