A blog addressing issues and topics of interest for Montana credit union board members. Read a new post every week.
When we get good at something, we can really focus in on it. Concentration is usually an admired trait, especially in school.
When we take on the task of credit union asset liability management, however, "concentration" becomes a risk that we need to focus on or we could end up in trouble. In credit union space, too much of one thing is a recipe for disaster, not a guarantor of success.
Concentration risk is typically described as putting all your eggs in one basket. In the case of credit union finance, you have several baskets that need to be watched. The CUNA CFO Council issued a whitepaper on concentration risk that clearly defines each of these baskets: loans, deposits, and third-party vendors. I would also add two additional baskets -- employees and income -- that you may need to examine for concentration risk.
The CUNA Environmental Scan Report 2014-2015 forecasts that fee income will decline in the next few years. Credit unions have generally increased their fee income levels to offset declines in lending and other increased expenses. An overreliance on fee income is an area of potential risk for your financial statements.
It's up to you to find the perfect distribution of the eggs in your baskets. There is no "one size fits all" rules for concentration levels. I like to explain this concept as Goldilocks and the Three Bears. Be like Goldilocks: avoid things that are "too small" and "too big." Find out what is "just right" for you.
As we enter fall and many boards focus on strategic planning, make sure you are examining your financial reports with a close eye on your concentrations and the risks they pose. Strategic planning is a great time to evaluate and initiate changes to keep your credit union on safe ground.
Tabitha Garvin is the VP-Fee Based Services for the Montana Credit Union Network. She would welcome any questions or comments on this material. You can email Tabitha or call her at 800-745-5546, ext. 132.