Being “not for profit,” many credit unions have felt that profitability analytics is inappropriate. Nothing could be further from the truth. Credit unions, at a minimum, need to make an appropriate level of profitability so as not to run out of capital as they grow. Now, as competition is getting more intense, credit unions are being forced to be savvier in pricing and how they deliver the products to members, just to survive.
Funds Transfer Pricing (FTP) has become a hot topic again as the recent interest rate volatility has sent shock waves through financial institutions (FIs). FTP is a great tool for measuring and managing elements of interest rate risk that most ALM systems simply can’t do. Simultaneously, it is critical for understanding where value is created or destroyed in the FI. It is equally important as an input to pricing loans and deposits to reflect embedded interest rate risk. However, many simply don’t understand the basics of FTP and how it can benefit the FI. This paper outlines those basics and the power of understanding this knowledge.
From time to time, Kohl is asked to do "comparison audits" for companies with existing internal profitability solutions whether commercially purchased or homegrown. The differences that are most common and the most dramatic usually occur when looking at how people's costs are attributed to different products. This paper shows just one example of how wrong some systems can be.
WAL is one of the more useful analytic tools one can calculate. That is because it is not only how many years it will take to receive half the amount of the outstanding principal, but also it is the ratio of fees and costs to balances on a percentage basis plus more.
Creating value for stakeholders should be the strategic objective of the board and executive team, yet this goal is not always strictly about making more money. In not for profit entities, such as credit unions, the real objective is to maximize membership value in the form of better service, lower fees and loan rates or higher deposit rates. These objectives need to be balanced by targeting a return on assets (ROA) and capital level which enables growth and sustains the credit union through good times and bad.
Financial Institutions have been offering rewards transaction products for some time. The rewards credit card is offered by many CU’s with different perks designed to drive member transactions to their product. Our clients are often surprised by the performance of those card programs. Both good and bad.
There is a saying that those who complain about something the most are often the guiltiest. Ironically, this applies to Funds Transfer Pricing (FTP) too. Lending people often say they do not understand, believe, or trust FTP results. What they fail to realize is that they apply the same simple principles to their borrowers. FTP is simply applying their own rules to themselves. This is explained with a simple example.
Many credit unions struggle with the concept of profitability analytics. As not-for-profit entities, many believe profitability should not be the objective. They also mistakenly think profitability analytics is only about maximizing profitability. Both concepts are simply wrong. For credit unions, profitability analytics is about managing profitability to appropriate levels, not maximizing it. But what is the appropriate level of profitability?
Many credit unions continue to use their internal cost of funds rate as the implied funding rate for new lending activities. On the surface that sounds reasonable, but after just a little bit of deeper thinking that mindset doesn’t make a lot of sense.
What is a CFO? As we all know, CFO stands for Chief Financial Officer, which means that they are responsible for the finances of an organization, but what does it really mean to be a CFO? It can be argued that most are only CAOs, Chief Accounting Officers, and not CFOs.
One of the side effects of the pandemic is the explosion in the savings rate and the level of
deposits at financial institutions. Many institutions have lowered their deposit rates because, with loan demand down and investment yields at historical lows, they want to encourage people to take their money elsewhere. Is this really the best thing to do?