In September 2006 at WesCorp’s Credit Union Outlook conference in Las Vegas, more than 300 of the nation’s credit union leaders gathered on the last day of this popular three-day economic forum to hear WesCorp announce the first of its annual Best Practices honors entitled the InsideRISK Awards. Following is a case study of Kern FCU, one of the years winners.
When liquidity was plentiful, Kern FCU had no visible problems managing its cash balances. Loan demand in Kern County was tepid, and deposits remained high. As a practice, Kern FCU limited its loan-to-share ratio to 95 percent or less.
During the past few years, however, lending activity in the region heated up. This put Kern FCU in a position whereby its ability to keep up with loan demand was limited by its ability to effectively manage its cash position. The credit union’s limited ability to predict cash flows put it in a defensive investing posture that did not allow it to maximize yields on excess liquidity, which made less income available to members for dividend payments.
This, in turn, made less than optimal income levels available as dividends to depositors. It was clear that some changes were needed in order to stay competitive.
After closely examining its liquidity management processes, several processes that needed improvement were identified and the following six goals were established:
• Better forecast cash needs
• Better anticipate contingencies
• Improved loan and share offerings to members
• Ease of cash flow preparation
• Ease of understanding the report
• Strategic liquidity management
It was felt that if the credit union could make some gains in these areas, it was possible to improve member service materially.
After considerable analysis of historical cash flow patterns, it was decided that a six-week rolling cash flow forecast would be the ideal tool for improving the cash management efficiency. This time period was specifically selected because, if it were successful, it would allow Kern FCU to increase its targeted loan to share ratio well above 100 percent, and perhaps up to 115 percent, the ultimate in improved member service.
In the early development stages, the credit union incurred some setbacks. There were still too many unexpected borrowing needs (which can get expensive), and the confidence to price more aggressively was taking time to develop. The credit union staff stayed with the program, however, and for a time nearly every decision made involving even the smallest amount of cash was captured and analyzed—with the goal of establishing a predictive behavior on cash flows whenever possible.
One of the main tools that the Kern FCU used in order to develop this cash flow report was the daily member statement found each day on WAVE (WesCorp’s online transaction interface). In fact, the credit union now conducts a weekly update to its six-week forecast and the beginning point for the analysis is an automated feed directly from the WAVE system. The report is easy to read and leadership has found it to be invaluable in managing the credit union.
The results of the endeavor thus far are impressive. Kern FCU increased its loan to share ratio to 110 percent, and the ability to plan for liquidity needs well in advance has helped to lower its cost of funds and, in general, improve funds management.
Two side benefits from this cash flow forecasting model even surprised Kern FCU’s management. First, by using the same methodology and applying it to its annual strategic planning and budgeting process, the credit union’s ability to successfully plan for growth has been improved tremendously. And finally, the turnaround time for analyzing and seizing on new financial opportunities is much quicker and relies not on anecdotal pieces of information but on well-thought out analysis.
So there you have it; more loans to members, a better strategic planning process, and faster, more reliable opportunity analysis.
The annual InsideRISK Awards will again be presented at WesCorp’s Credit Union Outlook conference, slated for September 17-20, 2007, at the Bellagio in Las Vegas. For more information about making a submission, please contact me at the email address below; for information on Credit Union Outlook, please visit www.wescorp.org .