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Yield on Assets—How Low Can it Go?

How does net income look for 2013?  Even if your budget is showing satisfactory earnings you might not be out of the woods yet.
Earnings could be temporarily propped up by higher yielding loans and investments put on the books in years past.  Unsustainably low provision for loan losses could also be skewing the picture.
Consider doing a long-term forecast to see how the business model performs after higher yielding loans and investments mature.  We would recommend a forecast of at least three years.  This does not need to be a three year budget; simply use high level operating expense assumptions in years 2 and beyond.
If you are not sure you want to invest the time to create a long-term forecast, minimally invest 15 minutes in your next ALCO meeting working through an estimate of new business profitability using the New Business Calculator.  Populate this with rates on loans and investments that are currently being booked (not year-to-date yields) for a preview of where earnings could be headed once higher yielding loans and investments mature.  The earlier you can spot trouble ahead, the sooner you can act to head it off.
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Budgeting For Loan Growth

In this uncertain economy, many credit unions are seeing loan growth come in below budget.  Others are experiencing loan growth that meets their budgets; however, they are still below budget on loan interest income.  Why?  Interest rates have fallen since their budgets were created and competition for loans has resulted in the credit union getting the loans at a lower rate than budgeted.

Example 1:

 

Can the credit union make up this revenue variance by making more loans?  Maybe, but as the example below indicates, the credit union would need to grow loans 25% over the budgeted amount to breakeven on loan interest income.  Many credit unions would feel this is not achievable in today’s environment.

Example 2:

If the credit union is not able to increase loan growth, then, all else equal, net income will fall short of budget.  However, all else doesn’t have to stay equal.  While cost of funds may be hitting a floor for some places, other credit unions still have room to move lower.  And operating efficiencies are key for surviving today and being successful in the future.  Remember, the point at which you address a problem is directly related to the number of viable options you have to solve it.  If you are in this situation, begin laying out alternative plans now to help achieve your desired level of income.