Improving Your Effectiveness As a Credit

Union Official

NCUMA 2015 Hawaii Conference

November 7, 2015

Ron Parker parkerconsult@cox.net

1-520-275-5043

Develop a Watch List

Watch list

a list of items/things to be monitored

in order to prevent loss, damage, etc

Watch ListAREAS OF POSSIBLE/REAL

CONCERN

AREAS OF REAL/POTENTIAL LOSS

REMINDERS

AREAS OF POSSIBLE CONCERN--Industry

• Taxation

• Rising costs of regulatory compliance

• Non-bank competitors

• Relevancy as a provider of financial services

• Data/IT security issues—cyber security

• Volunteer system and succession

• Capital—supplemental and risk based

• Business model—reliance on net interest margin/fee income

• Demographics of membership

• Appropriate Products, Services and Delivery

• Effective Planning

• Risk Management

• Governance and oversight

CU CEO financial and risk management priorities Address regulatory compliance requirements

Improve lending policies and processes for improved risk management

Consider how to replace NSF/OD income with other fee income

Improve capital ratio

Establish an enterprise risk management (ERM) function

Clean up the balance sheet/improve credit quality

Address fraud and information security concerns

Improve investment and ALM policies

Lower cost of funds

IT/Data Security

Increase loans

Improve overall examination scores

Other CU executives’ concerns

Fraud management/mitigation

Successfully launching new projects

Getting maximum value from existing technologies/vendor relationships

Too many projects; too few resources

Information security issues/compliance

Delivering quality support to users

Vendor management issues/ compliance

IT staff retention and development

54%

53

53

47 12%

32

38

45

45%

Weak economy/ loan demand

70%

Interest-rate environmentRegulatory

burden

53%

19% 18% 12%

Membership growth

Credit quality/ problem loans

Growing fee income

CEOs Concerns

WHAT CAN CAUSE OUR CREDIT UNION

SIGNIFICANT LOSSES AND/OR THREATEN

OUR FUTURE EXISTENCE!

WHAT ARE CONCERNS OR

CHALLENGES FOR YOUR CREDIT UNION

OR THE CREDIT UNION INDUSTRY?

Watch List Areas

WHAT ARE MINOR

PROBLEMS AND WHAT ARE BOAT

SINKERS?

Watch List Areas

WHERE DO WE NEED TO IMPROVE?

WHERE DO I NEED TO IMPROVE?

Gain an Understanding

of Effective Governance

Observations of Boards

• Increased focus on ethical conduct

• Increased emphasis on improving corporate governance

• Challenges in succession

• Increased understanding of general credit union finances and risks

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1. Establish expectations: What is the board and management responsible for; what do we expect from management, staff and ourselves.

2. Clearly stated responsibilities and authority: To the CEO, staff, committees etc. Doing so will allow the board to hold these groups accountable for meeting board-stated expectations.

Policy Governance ModelBy John Carver

Avoid any and all actual or

appearance of conflict of interest;

unethical or inappropriate

conduct!

No Official nor Family Member Should Ever Profit in any

manner from their position as a Credit Union Volunteer!

• In which areas do WE as a Board need to focus our attention?

• Where do I as an individual Board member need to focus my attention?

• What do my fellow Board members expect from me?

Characteristics of Effective Officials

• Has a Passion for the Position

• Understand the Duties, Authorities and Responsibilities of the Position

• Understand effective Corporate Governance Principles and Practices

• Right Personnel and Rewards

• Effective Evaluation of Management and Board

Characteristics

• Avoids any and all actual or appearance of Conflict of Interest or Unethical Conduct

• Understands type of Risks of Loss and how they are monitored, measured and MANAGED

• Have effective Planning Processes in place

• Have well-defined Succession Plans for Board and Key Management positions

Characteristics• Understands Key Financial Information

• Understands Accounting Fundamentals

• Understands managements assessment of the Needs of the Membership—

products, services and delivery systems

• Understands Key Regulatory Requirements and Areas of Focus

Have a Passion for the Position

–Attends all Meetings

–Has Read and Studied all items to be discussed—i.e. is PREPARED

–Asks Questions, Expects

Understandable Answers

2011 Letters to Federal Credit

Unions

11-FCU-02 Duties of Federal Credit Union Boards of Directors

Key Provisions1.Responsible for the credit

union’s general direction and control

2. Carry out duties in good faith, in the best interests of the membership

3. Administer affairs fairly, impartially, and without discrimination

4.Maintain a working familiarity with basic finance and accounting practices

5.Direct operations in conformity with Federal Credit Union Act, NCUA Rules and Regs, other laws, and sound business practices

6.Rely on information prepared or presented by employees or consultants to be reliable and competent

George Marshall's Leadership Principles

• Candor                    Speak honestly and responsibly

• Commitment         Faithfully adhere to what is right

• Courage                  Be bold in speech and deed 

• Integrity                 Speak and act with honor

• Selflessness           Service above self-interest

Evaluate Performance

Management, Board of Directors and

major Committees (How many

Committees do we need?)

HAVE WE ESTABLISHED WELL DEFINED MEASUREABLE GOALS AND PROVIDED MANAGEMENT

WITH THE NECESSARY RESOURCES TO COMPLETE OUR

GOALS?

DO WE HOLD RESPONSIBLE PERSONNEL

ACCOUNTABLE…DO WE REWARD THEM

APPROPRIATELY

New Directors on the Board

Source: Filene Research Institute

Our board should have term limits

Our board should have a mandatory retirement age

From Good to Great—

You can’t achieve great things without great people!

When in doubt, don’t appoint—keep looking.

When you know you need to make a people change, act.

CEO Succession Planning

If you had to name someone as CEO immediately (not on an interim or emergency basis), could you?

Source: Stanford University, Heidrick & Struggles (2010)

If you have an emergency candidate to replace the CEO, is this person also a

succession candidate?

Seven Steps To A Board Succession Plan

Assess your credit union’s needs.

List required attributes.

Assess current board members.

Provide opportunities for development.

1

2

Develop a process to anticipate voluntary board member departures.

Build a list of potential members and start to orient them to the credit unions.

Develop a formal board member succession policy.

3

4

5

6

7

Determine if We Have the Right Management

Personnel

DO WE HAVE THE RIGHT MANAGEMENT TEAM IN

PLACE TO PROVIDE CURRENT AND FUTURE

LEADERSHIP—

BALANCE OF MANAGERS AND LEADERS

Who are our Leaders and Managers—

Where will future leaders come

from?

Leadership Vs. Management• Leaders climb

trees and determine the direction we should go to get out of the jungle.

• Managers cut down the

trees in the most efficient and effective manner.

We need Managers when it’s business as usual!

We need Leaders when we need to make changes!

ARE WE PERFORMING APPROPRIATE PLANNING

PROCESSES—

STRATEGIC, BUSINESS, TECHNOLOGY AND

CAPITAL

NO ONE CAN PREDICT THE FUTURE BUT EVERYONE CAN

SAY WHAT IF? AND PLAN ACCORDINGLY!!

HOPE IS NOT A STRATEGY!

Merger Strategy Plans• Up stream and down stream criteria

and guidelines

• Change in ownership provisions in management contracts

• Fundamentals---Best interest of membership and staff short and long term!

“There will be fewer than 1,200 credit unions in 2030, and the vast majority of them will be over $1 billion in assets and a substantial number will be over $10 billion.

Any credit union under $100 million in assets will be referred to as ‘tiny.’”

CU System OverviewSystem Concentration

• The trend towards the “mega-Credit Union will continue:– By 2014 the U.S. CU system is projected to have

well over 200 CUs with assets greater than $1 billion

– The billion dollar CUs will control:• Over half of total CU system assets

– An additional 1,000 CUs will have between $200 million and $1 billion in assets• Approx. 35% of total CU system assets

Succession Planning

• Does the plan address both retirement and extended absences of key Credit Union personnel?

Is there a Board of Directors succession plan?

DO WE HAVE A COMMON VISION FOR THE FUTURE? IS OUR VISION REALISTIC

AND IN THE BEST INTEREST OF OUR

MEMBERSHIP?

GAIN AN UNDERSTANDING OF KEY FINANCIAL INFORMATION

Credit Union Financial Reminders

IF WE WANT TO INCREASE NET INCOME??

WHAT ARE OUR ONLY TWO OPTIONS:

Revenue/Income - What we Earn

What are our sources of Income?

• Loans-Loan Income• Investments – Investment Income

• Fees, Charges and Other Income

Costs/Expenses• Cost of funds--Dividends

• Provision for loan losses

• Operating expenses

Net Income

Total Income less

Total Expenses =

Net Income or loss!

Income Statement

Income– Loan interest– Investment interest

Dividends

Margin/Spread

Income StatementMargin/Spread

Fees and Other Income

Costs and Expenses–Provision for Loan Losses–Operating Expenses

NET INCOME

ROA--Return on Assets (or Return on Average Assets)

• It is a standard measure of profitability in financial institutions

NET INCOME/ASSETS

Assets - What we OwnEarning

Cash and equivalentsLoans

InvestmentsNCUSIFOther

Non-EarningCash

NCUSIFProperty and equipment

Other

Liabilities - What we Owe

To Members

SHARES

To Others

Liabilities - What we Owe

What portion of our Assets are funded by

borrowed funds?

All but Member’s Equity (Capital)

What is Capital?Capital is not cash

• It is the accumulated earnings and losses since you started the credit union.

• Tells you what portion of your assets belong to your members (collectively) and what part is dedicated to your depositors and other creditors

Net Worth and Earnings

A Credit Union’s only source ofCapital is

SUPPLEMENTAL/ALTERNATIVE SOURCES??

Member’s Equity (Capital)

Capital Ratio=Capital/Assets

How can you increaseyour Capital ratio?

HAVE A PASSION FOR YOUR POSITION!!

Have a Passion for the Position

–ALWAYS, puts the Best Interest of the Credit Union and its Stakeholders ahead of own Best Interest.

–Continually Try to Improve your ability to more effectively Govern

–Knows When to Retire