Ten Issues Impacting Credit Unions in 2001

Clifton Gunderson, the third largest auditor of credit unions in the country, recognizes the importance of identifying and addressing key issues impacting credit union industry


Clifton Gunderson, the third largest auditor of credit unions in the country, recognizes the importance of identifying and addressing key issues impacting credit union industry. Their staff have not only worked in the credit union and financial services industry, but have been providing auditing and consulting services to credit unions for over 50 years. The credit union specialists at CG have identified the following ten issues that we believe will be impacting credit unions in the coming year:

1. Personnel

The credit union industry is not alone in this category. All companies are continually searching for qualified, competent individuals and this makes competition for key personnel more difficult. Credit unions also face the challenge of training key staff to ensure that future credit union leadership will be available. Questions that management is asking about their personnel are:

  • Is the quality, efficiency and skill competency level of our personnel improving?
  • What skills and core competencies will our employees need in the future?
  • Are the skill levels and competencies in existing key management positions sufficient to provide the credit union leadership and management we will need in the future?
  • Will our training and education programs advance our personnel to the skill level and competencies that we will need?

Tips to recruiting and retaining key employees

  • Identify key personnel
  • Develop an employee retention program
  • Monitor employee turnover
  • Develop employee retention or satisfaction surveys
  • Understand how employees think and feel about their jobs
  • Involve multiple interviewers when looking at candidates and related interview questions to the client's potential job
  • Evaluate compensation and fringe benefits programs for competitiveness
  • Review employee training and advancement programs
  • Develop employee evaluation, goal-setting, counseling and mentoring programs

2. Planning

The success of a credit union depends on its vision of what the organization can become, a mission that makes sense (and that can be remembered by everyone) and strategies for the organization to build on its strengths and mitigate its weaknesses.

Credit unions are developing processes that envision what their credit union will look like in the future (3 to 7 years from now) in terms of asset size, services and products offered, delivery systems, markets, competition, and technology requirements. Strategic planning is a systematic process that defines management's course in assuring that the credit union continues to exist and provides a framework and vision for the credit union's future direction. It is important that the strategic plan covers a reasonable time frame or span into the future. The plan normally ranges between 3 and 7 years, with revisions annually or, at a minimum, every two years. The plan's scope needs to include all appropriate criteria, including target markets, resources, technologies which incorporate all of these areas into the final strategic/visioning plan. The following diagram indicates typical time frames for each of the credit union's individual planning levels.

3. Risk Assessment

Being fully aware of risk levels in your credit union and how the exposure to various risks is changing i.e., increasing or decreasing, can help management and board of directors devise plans and strategies to maintain risk at a tolerable level. Many credit unions are performing semi-annual and annual assessments of exposure to risk of loss. A formalized assessment of exposure of loss generally includes the following risk areas:

  • Interest rate risk - the risk that changes at market rates will adversely affect credit union profitability and capital
  • Credit risk - risk of not recovering amounts loaned or invested
  • Liquidity risk - risk that your credit union will be unable to fund member loan demand and share withdrawals without adversely affecting profitability or capital.
  • Operation risk - may include areas such as the risk of fraud, embezzlement, self-serving decision making and conflicts of interest, lack of planning and due diligence, poor decision making processes and not effectively understanding the risk and returns of new products and services, technology and facility investments, and the like.

Other risks may include insufficient or inappropriate products, inadequate service delivery systems, inadequate or incompetent personnel and related training and advancement programs, and inadequate volunteer training programs.

4. Profitability and Maintenance of Capital

Although credit unions are experiencing strong profitability, several credit union's profitability will be challenged by a variety of factors impacting their bottom line, including decreasing net interest margins, increasing compensation, fringe benefits and training costs, increased technology spending, the need for additional brick and mortar, ATM's delivery systems and the need to provide competitive member products and services that are not high-profit margin items.

5. Lending, Collections and Related Areas

Although delinquency and related charge-offs in most cases are at an all-time low level, many credit unions have added substantial credit risk to their loan portfolios and therefore, will experience increased delinquency charge-offs and related increases in their allowance for loan losses as a result. Credit unions have been experiencing substantial loan growth due to consumer confidence in credit unions, a high level of service, and the competitive interest rates. The offering of new lending products such as indirect lending and leasing, sub-prime lending, risk-based pricing, leasing programs and relationship pricing has also added to loan demand. Changes in the size and mix of loan portfolios and the possibility of a decline in the general economy will make management's evaluation of the adequacy of the allowance for loan losses a greater challenge than in the past.

6. Asset Liability Management

NCUA Letter 99-CU-12 emphasizes the importance of interest rate risk management. The letter focuses on mortgage-related assets because of their longer duration and the impact that these loans may have on interest rate risk. This letter indicates that the majority (64%) of all real estate loans held by credit unions are fixed rate, and that this percentage has gradually increased since 1990. Additionally, credit unions with substantial concentrations in fixed rate mortgages is also at ''historic highs.''

NCUA will evaluate the effectiveness of a credit union's risk management process relative to the amount of the credit union's potential balance sheet risk and capacity to absorb such risk. They further describe in detail major balance sheet risk and an outline of the interest rate risk management process. The letter also includes the need for asset liability management and investment policy reviews and the inclusion of specific procedures for managing the credit union's interest rate risk and the type of risk analysis management should conduct. At a minimum, policies should indicate how much interest rate risk the credit union's balance sheet can accommodate in relation to its capital position. The letter further discusses various methods credit unions have available to measure interest rate risk and provides examples of discounting future cash flows, a basis for much of asset liability management analysis.

7. Regulatory Issues

A number of proposed and recently finalized Rules and Regulations will impact credit unions in 2001. Prompt Corrective Action of the Regulations impacting the organization of federal credit unions, Risk-based net worth requirements, Security programs and guidelines for safeguarding member information, Other privacy regulations relating to the protection and confidentiality of member information, potential regulatory flexibility and exemptions, leasing, privacy of consumer financial information, streamlining processes for adding Predatory lending issues, E-signature legislation, bankruptcy legislation are a few of the issues to be addressed

8. Internal Controls and Member Service Delivery Systems

With the rapid expansion of technology, the speed of service and product delivery expected by members is increasing at a dramatic rate. Service delivery structures including MSR, FSR, and other Personalized Service concepts improve the efficiency and effectiveness of service to members; however, they oftentimes result in internal control deficiencies. Traditional internal control systems i.e., segregation of duties and other dual control systems, are often inappropriate with present service delivery systems. The result is the a change in oversight procedures, including internal audit services, quality assurance reviews and other automated reviews of transactions after their completion as opposed to controls being placed in the origination, processing and disbursal levels of the control system.

9. Field of Membership Issues

Membership in credit unions has grown at a fairly modest rate for the past decade. Federally insured credit unions have generally had annual membership increases in the 2%-3% range. Federally chartered growth has more recently remained flat due in part to conversions from Federal to State charters in some regions. Credit unions are assessing their present fields of membership to assess potential rates of growth in the future, and examining the demographics, income levels, lifestyles of their present membership to help predict who the future members will be and the services and products that they will demand.

10. Volunteer Structure

With personal time becoming a higher priority, it is more difficult to find qualified members who are willing to dedicate their time to serve as volunteers on the Board of Directors, Supervisory Committees, and other Committees of the credit union. Time commitments, potential liability, complexity of credit union operations and the need for volunteers to stay current and understand operations, including technology and product alternatives put a larger challenge on the industrys' backbone i.e., volunteerism.



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May 21, 2001



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