C. Myblog

Setting Board Expectations

October 14, 2011

Setting board expectations has always been key.  However, it is increasingly important as many credit unions are seeing their ROA jump—largely due to falling provision ratios.  Over the last two years, the industry average PLL has declined from its peak of just over 1% in 2009 to about 0.50% as of the first quarter in 2011 (see graph A below, Source NCUA, FDIC).  The decrease in PLL has been the single biggest reason that the industry average ROA has increased since its low in 2009 (see graph B).

While this has been great for the industry, the question is, how sustainable is the decline in PLL? In many cases, the decline is not sustainable as credit unions are running a provision that is below “normal” levels or reversing accruals to ALLL that they believe to be excessive (see post Planning for PLL).  This means the current ROA is temporary, as it will decrease once the provision returns to normal levels.

Management teams need to communicate this to their board and set the expectation that their financial position will be different going forward.  This will help prevent misunderstanding between the board and management and ensure that the two groups continue to work together to position their institution to be stronger in the future.

Table A:

Table B:

  • Michael Silvers

    Exceptional tip. We are doing well but for the exact reason you state. In today’s environment of low interest rates and tenuous financial environment, it wouldn’t take much to have to increase funding for loan losses. Thanks for the clarity!
    Michael J Silvers
    Patriot Federal Credit Union

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