"What does that mean?" You ask. Well, we have long said that we are in the business of buying and selling money. We buy from our members in the form of dividends. We sell in the form of either making loans or putting funds out in investments.
"Which is best and when?" Like everything in our business, it depends.
For the simplest break-even analysis look at your investment yield and you net loan loss ratio. In order for a loan to have a better return to the credit union, the loan rate must be greater than the investment yield available and the loan loss ratio. Say you earn 1.75% on investments and your loan loss ratio is 1.25%. You would have to grant loans at 3% or higher to have an improvement over what you could obtain by simply investing the funds in government agencies or other investment programs. I've seen credit union chasing auto loan rates too low when an investment would have been a better return. Let someone else take the hit on losses.... at these rates, you don't have to go far above normal losses to have absolutely NO return on loans.
Butt weight one minute hear now. i am looking at the delinquency ratio and charge off ratio at telesis and wescom. these ratios are huge. i mean these ratios far exceed peer. maybe these huge crebit unionz understand sumting you don't quite comprehend. they are taking notez from WesCorp FCU - the business model called: Make It Up In Volume. And if these risk takers go kaput - well the NCUSIF will bail 'em out. I mean actually, you will bail 'em out with mo' assessments.
ReplyDeleteDear 1st Thoughts:
ReplyDeleteI have come to learn the NCUA has imposed a 25 bp (basis points) tax on all NCUSIF credit unions. This NCUA imposed tax on tax exempt credit unions has been called an assessment. But an assessment by any other name is still a tax. How does a credit union factor in such an oppressive tax when it comes to setting loan rates? Sure the tax is imposed on the credit union but the membership is paying for it with a combination of increased loan rates and reduced dividend deposit rates. The federal credit union tax exempt status is getting pretty darn expensive to maintain. Certainly, Skank of America & Wells Fraudo are not getting clipped 25 basis points. When will it become profitable for non-profit tax exempt credit unions to convert to a bank charter?
One glaring weakness in your analysis - credit unions are organized to make loans to members, not be tax-exempt investment clubs.
ReplyDeleteNot sure how much to weight this factor, but it has to be part of the equation
Actually Credit Unions are organized to "serve" their members. We usually look at the entire package... We don't give away the store on savings or loan rates. So, why should we make a 2% 5-year car loan, when we can find investments that yield much better? In this environment, chasing rates, just to get loans out, is a very bad strategy. It wasn't always so, and it won't be so again (some day), but for now, the entire membership suffers when loans are written at such low rates.
ReplyDelete