Assign “Buddies”.Before we get started, I have a short video for you…*Click on the stethoscope, and let “I love you.” video play* - 1-2 minutes.This video clip is funny, but really true. The major difference between a bank and a credit union is in the fact that we have members - and we love them!Today, I’m going to be asking you a lot of tough questions and two “ultimate” questions. The first ultimate question is this: “Do you love your members?”If so, this class is definitely going to be a eye-opening and life-changing experience. If not, I challenge you with another question: “Why don’t you love your members?”The reason these two questions need to be asked before we get into any material is the fact that, ultimately, our goal as an organization is to serve our members. As a not-for-profit company, our mission is SERVICE! If the credit union isn’t healthy, we can’t accomplish our mission, and if we don’t love our members and have a driving, deep desire to serve them, then we need to genuinely ask ourselves, “Why not?” How do these questions fit into today’s material? Well, today we’re going to discuss the different aspects of credit union health and how we as employees fit into the big picture. We’ll spend some time discussing the NCUA CAMEL rating, our Strategic Plan, and how our daily decisions impact credit union health. If we love our members, this information will be priceless and relevant. If we don’t, this class is worthless. If we don’t care about our members, we don’t care about the health of the credit union and it’s ability to continue serving.With that in mind, let’s take a few moments to recap from Credit Union Finance – Module 1.
Who remembers what Capital is? Capital is anything a business or person uses to create more wealth.What about Assets? Assets are anything a business or person owns – including loans.What about Liabilities? Liabilities are anything a business or person owes.Equity? What is owned free and clear. Assets less Liabilities.What does Risk vs. Reward refer to when discussing interest? The higher the risk, the higher the reward.Who remembers what the Federal Funds Rate is? The rate at which financial institutions effectively lend money to each other.What about Prime Rate? Reported by the Wall Street Journal's bank survey, is among the most widely used benchmark in setting lending rates. It is an average of the prime rates from the U.S.’s 30 largest banks.OK, now that we’re all caught up with Module 1, let’s introduce some new terms that you’ll see in this module.
The main five terms we need to introduce are as follows:Insolvency is “the inability to pay debts”.Resilient means “able to recover from or adjust easily to misfortune or change”.A legacy is “something received from an ancestor or predecessor”.Compliance means “conformity in fulfilling official requirements”.And earnings means “the balance of revenue after deduction of costs and expenses”.OK, that’s all the definitions you’ll need for this module, let’s get moving into the material. First up: Credit Union Health.
Just like most of us don’t really like to go to the doctor for health checkups, overall credit union health is rarely discussed. Partly because we don’t all understand the components and partly because the credit union’s health is something we imagine only senior management, the CEO, and the Board of Directors worry about. This class is designed to address of both of those subjects.Because this is a co-op, we all should have a basic understanding of the components that make a credit union healthy – we’re all part of the First Community family, and we all have a personal responsibility to ensure the continued success of the organization: from Teller to CEO to Board Member.In this first section, we’ll discuss the reasons that credit union health is important and what it means for members, employees, and the organization.
*Ask* Why is Credit Union Health Important? *wait for responses*The credit union’s overall health is important for a number of reasons:First of all, there’s a word called “Viability”. The root word is “viable”. According to the Webster’s Dictionary, viable means:“a: capable of working, functioning, or developing adequately b: capable of existence and development as an independent unit c(1): having a reasonable chance of succeeding (2): financially sustainable”All the parts of this definition point to an ability to remain stable – stable existence, stable growth, stable development, stable success. If a credit union is healthy, it’s stable. It’s viable.Second, Service indicates the ability of the organization to execute its core competencies – providing service, educating members, and offering solutions to improve the membership’s financial health. If a credit union is healthy, it’s able to provide essential services that it’s membership wants and needs, and instill financial health in its members.Last, the Growth of the organization depends on the health of the organization. What do healthy plants do? What does an unhealthy plant do? Healthy plants grow and spread while unhealthy plants wither and die. If a credit union is unhealthy, there’s little hope for any success at all. A healthy credit union naturally grows and spreads – in relationships, in members, in loans, in deposits, in employees, and in investments.So, this is all great and good, but what does credit union health mean for a member?
Healthy credit unions are able to offer “better”. You heard that right – I said that healthy credit unions can offer “better”. “Better what?” you ask. Better everything. Better investment rates, better loan rates, better employees, better services, better knowledge, better co-operative spirit, etc.If a credit union is healthy, the income generated due to that health is always returned to members. This income takes many forms – including the rates, services, and staff. Yes, “staff”. We’ll get to how credit union health impacts you as an employee, but the point is that a healthy credit union can afford to train its staff better, pay its staff better, and add value to the employee experience so that morale is off-the-charts-great! This ultimately ends in an amazing member experience.This leads us into the impact that credit union health has on you.
As an employee, credit union health creates higher job security. A healthy credit union doesn’t need to lay people off or close branches. In fact, a healthy, growing credit union does the opposite – they hire people! A profitable organization realizes that it’s most important resource is it’s people, and it invests in you as a resource.With that health comes growth, and with that growth comes new opportunities for advancement. This gives employees chances to move into new, challenging, and exciting roles. It gives all of us a chance to prove we have more and more value to add to the credit union.Also, a healthy credit union is able to invest in resources for its staff. Better and more efficient technology allows us all to do our jobs easier and better. On-going training and development allows us to learn and grow professionally so that we can do our current job better and learn new job skills for new job roles.Ultimately, though, we want to know what credit union health has to do with the credit union itself. We know how it impacts members and employees, but how does it impact the organization?
The first question we need to ask is “What value does a credit union provide to the world?”When we answer that question, we understand how credit union health impacts the organization and the world around it.Long-term viability means the credit union will be around for our children, and their children, and their children, and so on. This credit union could be the same credit union your great-grandchildren use, someday. That’s big. That’s a legacy.We also support our communities in the form of less-expensive service options and provide jobs to residents in the area. We volunteer to support local community events.By continuing to operate, we also continue to support the Political Action Committee, who needs credit unions to remain healthy in order to fund the credit union movement in the USA. Other credit unions also rely on us to contribute our ideas, support, and energy so that they, too, can remain healthy. The entire credit union movement is entrenched in this drive for co-operation.All of these factors are why credit union health is so important.Now that we’ve established why credit union health is important, let’s change gears a little and talk about our agenda for the day.
Today, we’ll be starting with the NCUA CAMEL rating – What are the components? How does the rating system work? What financial ratios are important? What is it?Then, we’ll shift into discussing the role of First Community’s strategic plan. What’s the purpose? Why do we have the certain goals we have? What impact does the success of strategic goals have to do with the credit union?Last, we’ll shift into discussing our individual roles within the grand scheme of things – the Big Picture. How do our decisions impact the credit union’s health, the Strategic Plan, and the CAMEL rating?It’s important to note that all of these sections, components, and pieces fit together. They’re all interrelated, building on top of each other. One without the other isn’t going to create overall health in the credit union. Try to keep that thought in mind as we work through these topics.First up, let’s talk about that CAMEL!
Camels are super weird creatures. According to the Discovery Channel’s Animal Planet, “When conditions heat up, camels can increase their own body temperature, which prevents sweating and therefore water loss. Camels can tolerate a 40 percent loss in body mass when food and water are scarce, an amazing feat when one considers that a 15 percent loss would kill most other mammals.”Pretty cool.But, we’re not here to talk about the actual animal – we’re here to discuss the NCUA’s C.A.M.E.L. rating system.Which group was assign number “1”? What was your guess as to what that number meant?That number represents First Community’s desired CAMEL rating – a “1”. We’d take a 2, but we really want a “1”. What exactly does a “1” mean? We’ll find out in this section, but, let’s get a little history, first…
I should mention before we cover the history of the CAMEL rating that all the acronyms aren’t important. The important thing is that you understand the overall purpose of the CAMEL rating, where it has been, and where it’s going. With that in mind…The CAMEL rating system is actually known by another acronym, UFIRS – with means “Uniform Financial Institutions Rating System”. This system was originally created in 1979 by the Federal Financial Institutions Examination Council, otherwise known as the FFIEC.In October of 1987, the NCUA adopted the CAMEL rating system with 11 key financial ratios to evaluate the stability of credit unions.In 1991, the NCUA reduced the number of Key Ratios to 7, and then to 5 in 1994. Up until this point, the rating system was designed to evaluate stability and financial soundness.In 2002, the NCUA introduced RFE’s, or Risk Focused Examinations, to shift the rating system towards more of a risk evaluation than a stability evaluation.The next slide shows what the seven factors of risk are:
The purpose of RFE’s is to direct the NCUA examiner’s evaluation on forward-looking determinants instead of physical ratios, which may be a lagging indicator.Lagging indicators mean that the measurable results of something are available some time after the actual event. For example, let me take you back to the 2008 Summer Olympics, when Michael Phelps won 8 gold medals. As soon as they finished the race, it took a few seconds for the judges to post the results on the board for the swimmers to see (we, obviously knew instantaneously by the little clock in the corner of our screen). This is the lag we’re talking about. Physical ratios don’t provide instantaneous results, and may have some lag. Therefore, the NCUA instituted RFE’s to combat that delay.Examiners determine the ability of the credit union to recognize and adapt to changing economic conditions, competitive environments, and risk scenarios by assessing each of these factors a level (high, moderate, low) of current and future risk.Additionally, these risk profiles are interrelated with each other and the components of the CAMEL rating system, which we’ll talk about on the next slide.
The CAMEL rating system revolves around five core components. Capital Adequacy, Asset Quality, Management, Earnings, and Liability Management. It’s important to note that examiners base evaluations on absolute terms, not on peer comparison or predetermined benchmarks.Let’s take a look at the first component – Capital Adequacy.
Someone remind me what Capital is… *wait for response*The purpose of capital, according to the NCUA:“Capital cushions fluctuations in earnings so that credit unions can continue to operate in periods of loss or negligible earnings. It also provides a measure of reassurance to the members that the organization will continue to provide financial services. It serves to support growth as a free source of funds and provides protection against insolvency.”These are the Key Ratios for Capital Adequacy, but remember that these ratios could be lagging indicators, therefore the examiners will be focusing on how each risk factor impacts Capital Adequacy:(Write on Easel)Capital/Assets, Net Capital/AssetsRating Scale:1 & 2 = Maintain a level of capital fully appropriate to their risk profiles and can absorb any present or anticipated losses. Only difference is that a 2’s capital position isn’t quite as strong as a 1.
Who remembers what an Asset is? *wait for response*According to the NCUA:“The asset quality rating is a function of present conditions and the likelihood of future deterioration or improvement based on economic conditions, current practices, and trends.”Key Ratios (Write on Easel):Delinquent Loans/Loans, Net Charge Offs/Average LoansRating Scale:1 and 2 reflect high asset quality, lending and investment policies and procedures are in writing and are conducive to safe and sound operations. The difference between a 1 and 2 is that a 1 indicates minimal portfolio risk.
According to the NCUA:“Management is the most forward-looking indicator of condition and a key determinant of whether a credit union is able to correctly diagnose and respond to financial stress.”Components Include:Business Strategy/Financial PerformanceStrategic Plan – sets broad goals for the credit union &Business Plan – sets short-term goals for the credit unionBoth plans need to take into account the following steps:1. Evaluation of external and internal factors influencing business2. Clear, written statements of key objectives3. Comply with State and Federal laws and NCUA regulations4. Communicate objectives to all management and staff to ensure adherence to plans.Internal Controls Management Conduct Service to Members7 aspects of internal controls: 4 aspects of management conduct: 1. Loan to share ratioInformation Systems 1. Compliance with state/federal laws 2. Market penetrationSegregation of Duties 2. Appropriate comp policies/practices for sr. mgmt 3. Rate structureAudit Program 3. Avoidance of conflict of interest 4. Cost/benefit analysisRecord Keeping 4. Professional ethics and behavior Protection of Physical Assets Education of Staff Succession Planning Rating Scale:1 indicates that management is fully effective, responsive to changing economic conditions, able to cope successfully with existing and foreseeable problems.2 indicates minor deficiencies, but management produces a satisfactory record of performance.
Now, earnings weren’t covered in the first module of ABC’s of Finance, but who can tell me what earnings are? *wait for response*According to the NCUA:“The continued viability of a credit union depends on its ability to earn an appropriate return on its assets. It enables a credit union to fund expansion, remain competitive, and replenish and/or increase capital.”Key Ratios (Write on Easel):Return on Average Assets (Net Income after Operating Expenses/Past 2-year Average Assets)Rating Scale:1 indicates earnings are currently and projected to be sufficient to fully provide for loss absorption and capital formation.2 indicates earnings are positive and relatively stable, provided the credit union’s level of earnings is adequate.
What is a liability? *wait for response*According to the NCUA:“Liability management is the identification, monitoring, and controlling ofInterest-rate risk sensitivity and exposureReliance on short-term, volatile sources of funds, including any undue reliance of borrowingsAvailability of assets readily convertible into cashTechnical competence relative to liability management, including management of interest-rate risk, cash flow, and liquidityAssurance that the potential for loss in the credit union’s activities is not excessive to its capital.”Components:Interest-rate riskLiquidity riskRating Scale:1 indicates only modest exposure to risk, management is proficient at the measurement and management of risk, easily able to meet liquidity needs.2 indicates reasonable exposure to risk, management is sufficient at the measurement and management of risk, reasonable ability to meet liquidity needs.
*Break*Now that we’ve reviewed the major components of the CAMEL Rating process, we have a better understanding of how the NCUA evaluates a credit union. Remember that part of the Management component in the CAMEL rating is having a Strategic Plan. *Ask the group*“How many of you have worked for a company in the past that never seemed to communicate what the overall strategy and business plans were to their staff? It seemed like the only people who knew what was going on were the ones on a “need-to-know” basis?” Part of credit union culture is the communication of key strategic goals and initiatives to all staff members. We’re all on a “need-to-know” basis.In the next section, we’re going to review First Community’s strategic plan in a general overview, but we’re going to be looking at this plan with the knowledge of what key ratios are used in the CAMEL evaluation process. We’ll also be looking at the reasons the organization has established the goals that exist today.So, what are First Community’s Strategic Goals?
For those of you who have been to a Strategic Update Meeting, you’re probably well aware of the plentiful communication of these three key goals, but we’ll be simplifying them today. Most of us understand the numbers – what the actual goals are and where we are currently in relation to our goals. What most of us don’t know is the WHY. That’s what we’ll be discussing today. No numbers – I know, weird for a financial class to not be talking about numbers. What’s most important for you to understand today is why these goals are so important to the financial health of the organization.We’ll be covering each of these goals, but the general overview is for the credit union to Grow, Develop, and Preserve itself. As a living, breathing entity – we all have the need to grow and develop over time, and the most instinctual drive for being is self-preservation. All of these things are true of companies, too. We’ve simply wound these core needs into our strategic plan.So, with that in mind, let’s talk about “Grow”.
Growth is important to all companies, people, plants, organisms, etc. If we don’t grow, what happens? *wait for response*Right! A stagnant company is lifeless and dead – without growth, there’s no purpose, no drive, no determination. That’s why this goal is number one. So, how can the credit union grow?New loan relationships are one of the most important ways the credit union grows. These new loans bring in new members, including new deposits and enhance current members’ relationships. All of these are portions of the credit union’s growth.How does loan growth impact our CAMEL rating?*Allow participants to answerIf you remember from ABC’s of Finance: Module 1, loans are considered assets and we earn income on loans. This new loan growth impacts ALL of the 5 key CAMEL ratios in the form of loans, assets, and income. This particular goal impacts the credit union’s health tremendously.Did you know that loan growth leads to new and deeper member relationships? Let’s talk about that.
New Loans are a gateway to new and deeper member relationships, and member relationships are what drives additional loan growth, income from investments and fees, and cost to service the membership. Looking at our relationship with existing members and evaluating how many of our sticky products they’re using tells us whether our members are genuinely bought into the credit union movement and using First Community as their primary financial institution. Without goals centered around cultivating our current members’ relationships, we fail to recognize them as one of our priorities.I’d like to ask a question: “Is a Non-Checking Level 1 Member loyal to the Credit Union?”*Allow participants to answerProbably not. I’d like to ask another question: “Is a Non-Checking Level 1 Member profitable to the Credit Union?”*Allow participants to answerDefinitely not. Why?*Allow participants to answerExactly. They aren’t participating members in the cooperative, and they aren’t loyal. This is why Relationships is such an important goal. We want to increase the participation rate for our members, and we do so by tracking these three goals.How does deeper and more profitable relationships with members impact our CAMEL rating?*Connect to CAMEL rating on EaselNon-Interest Income is income earned non-interest-bearing sources. This obviously excludes loans and investments. We typically consider fee income and commission-based sources (like CUNA Mutual and Insurance Income) as contributors to this.How does non-interest income impact our CAMEL Rating?*Connect to CAMEL rating on EaselSo, we need to Grow and Develop. Let’s move on to Preserve.
The Efficiency goal entails measuring and evaluating the financial health and effectiveness of the organization. The previous two goals center around our relationships with members. This goal centers around the overall financial situation of the credit union. This particular goal is the most focused on achieving positive outcomes and holding the first two goals in balance with the financial soundness of the organization.The Efficiency Ratio is calculated as Operating Expenses/(Income less Dividends). This ratio can be equated to how much money it costs the credit union to create one dollar. If the ratio is 0.75, it costs the credit union 75 cents to generate 1 dollar, giving the credit union 25 cents in income.The Financial Performance Score is based on five financial performance ratios, many of which you’ll find similar to the CAMEL rating ratios:Operating Expenses/Gross IncomeROAA, Before NCUSIF ExpenseGross Income/Hours WorkedNet Charge OffsLoan Delinquency The Member Contact Matrix is based on five percentages as a portion of total personal adult accounts:Correct Address on File (No “Bad Address”)Email Address on FileReg E Opt-InE-Statement EnrollmentActive Home Banking (at least one log in per month)As you can see, these goals are the most related to the Strategic Goals and the NCUA CAMEL rating. Now that we’ve seen the WHY of First Community’s Strategic Goals, let’s talk about our role in the credit union’s financial health.
When we step back and look at the bigger picture of the CAMEL rating and the Strategic Goals of the credit union, it’s easy to get lost and think “How am I going to make any kind of impact on any of this stuff? It seems so much bigger than me…” What can you do to further the goals of Growth, Relationships, and Efficiency? How can you make an impact on the results of the CAMEL rating? More importantly, does your role in the company produce any kind of financial health for the credit union and it’s members?That’s precisely what we’re going to talk about right now.We’ll be asking some tough questions like this at the end of each talking point. Write down your thoughts and answers to those questions. When we finish this section, we’ll be breaking out to talk about them. Don’t be afraid to struggle with this section. Don’t be afraid to feel that un-nerving feeling of… “Wow… What am I doing to impact the credit union’s health?” This is the second ultimate question, and the question we need to think about the most. “What can you do to contribute to the credit union’s financial health?”I really want to encourage you to be thinking about your unique role in the organization as we cover this section. We’ll be talking about the 3M’s of waste, and I’d encourage you to write down your thoughts on how YOU can make an impact on the 3M’s. Bring them back to your manager and team. Talk about them. Be creative. Create some value to the organization.Ok. Let’s go.
Motion: Using unnecessary movement and energy used to perform tasks. Waiting: Workers rendered idle by bottlenecks or equipment breakdowns. Transport: poor timing; too frequent or infrequent movement of goods and deliveries. Overproduction: Producing items not immediately needed. Processing: imposing inefficient and unnecessary tasks; failing to synchronize systems.Inventory: stocking items not immediately needed.Correction: Producing defective products.
We’ve asked some hard questions today. Hopefully, you’ve thought about what sort of impact you have on the credit union’s health through your day to day decisions. What we’ll do, now, is break into groups and talk about the ideas we had while going through this last section.We’ll number off by numbers 1-4.*number group off by 1-4’s**tell each group where they’re meeting*Allow for 15-20 minutes of conversation.
Finance for Credit Unions - Module 2
Credit UnionFinanceModule 2:Credit UnionHealth
Recap from Module 1 • Terminology – Capital – Assets, Liabilities, & Equity • Interest – Risk vs. Reward • Economy – Federal Funds Rate – Prime Rate
Terms for Module 2• Insolvency – Inability to pay debts• Resilient – Able to recover from or adjust easily to misfortune or change• Legacy – Something received from an ancestor or predecessor• Compliance – Conformity in fulfilling official requirements• Earnings – The balance of revenue after deduction of costs and expenses
But, I don’t want to go to the doctor…CREDIT UNION HEALTH
Why is Credit Union Health Important?• Viability – Stabilizing the Co-op• Service – Executing Core Competencies• Growth – Continuing Success
Member Impact • Better Rates – Investment Rates – Loan Rates • Better Service – More Employees – Knowledgeable Staff
Employee Impact• Job Stability – No Layoffs – No Closed Branches• Advancement Opportunities – Organizational Growth• Sufficient Resources – Technology, Training
Organizational Impact• Continued Operation – Long-Term Viability• Community Development – Providing Services/Jobs – Volunteering• Furthering the C.U. Movement – Contributing to PAC – Co-Operating with other C.U.’s
Agenda• The C.A.M.E.L. Rating System – What are the components? – How does it work?• The Role of the Strategic Plan – Why do we plan? – What impact does it have?• The Bigger Picture – How do I impact the organization?
The most confusing animal, ever…THE C.A.M.E.L.
History of C.A.M.E.L.• 1979 – FFIEC develops UFIRS• 1987 – NCUA Adopts CAMEL in October with 11 Key Ratios• 1991 – Key Ratios reduced to 7• 1994 – Key Ratios reduced to 5• 2002 – NCUA introduces Risk-Focused Examinations
MUDAWork that adds no value to the end product.• Firing Input Process 1 W V W Process 2 V Process 3 W V Output V: Value added W: No Value
Seven MUDA’s Motion Waiting Transport Overproduction Process Inventory Correction
MUDA of MotionMovement that adds no value.• Searching for files• Extra clicks or key strokes• Clearing away files on the desk• Gathering information• Looking through manuals and catalogs• Handling paperwork
MUDA of WaitingIdle time created when material,information, people, or equipmentis not ready.Waiting for:• Faxes• The system to come back• Copier machine• Customer response• A handed off file to come back
MUDA of TransportMovement of information that addsno value.• Carrying documents to and from from shared equipment• Taking files to another person• Going to get signatures
MUDA of OverproductionGenerating more informationthan needed.• More information than necessary• Creating reports no-one reads• Making extra copies
MUDA of ProcessSteps and efforts that createno value.• Creating reports• Repeated manual entry of data• Excessive paperwork• Duplicity of work• Use of outdated forms• Use of inappropriate software
MUDA of InventoryMore information, projects, ormaterial on hand than needed.• Files in queue• Open projects• Office supplies• Emails waiting to be read• Unused records
MUDA of CorrectionWork that contains errors, rework,mistakes, or lacks somethingnecessary.• Data entry error• Missing information• Lost records• Rework• Rescheduled meetings
Eliminate MUDA 1. Find the Root Cause 2. Ask “Why” 5 times 3. Use 5W 1H Questions
5W 1H Questions Who What1. Who does it? 1. What to do?2. Who is doing it? 2. What is being3. Who should be done? doing it? 3. What should be4. Who else can do done? it? 4. What else can be5. Who else should done? do it? 5. What else should6. Who is doing be done? 3M’s? 6. What 3M’s are
5W 1H Questions Where When1. Where to do it? 1. When to do it?2. Where is it done? 2. When is it done?3. Where should it 3. When should it be be done? done?4. Where else can it 4. When else can it be done? be done?5. Where else should 5. When else should it be done? it be done?6. Where are the 6. When are the 3M’s being done? 3M’s being done?
5W 1H Questions Why How1. Why does he do 1. How to do it? it? 2. How is it done?2. Why do it? 3. How should it be3. Why do it there? done?4. Why do it then? 4. Can this method5. Why do it that be used in other way? areas?6. Are there any 5. Is there any other 3M’s in the way to do it? process? 6. Are there any
MURAVariation in the operation of aprocess not caused by the endcustomer.Unevenness, unbalanced work.Example:Employees are told to work likecrazy early in the morning only tostand around and do nothing late in the day.
Eliminating MURAHow frequently does it happen?Where does it happen?Who does it happen to?Which side it OK?
MURIOverburden on equipment,facilities, and people causedby MURA/MUDA. Pushing a machine or person beyond natural limits. Results in safety and quality problems. Causes breakdowns and defects.
Recap• Credit Union Health impacts employees, members, the organization, and the credit union movement.• The CAMEL Rating rates the health of the credit union by assessing the amount of risk the organization is exposed to.• First Community’s Strategic Plan is based on the health of the organization – Growth, Relationships, and Efficiency.• We all can impact credit union health by making good decisions and trying to eliminate MUDA,