Is Your Credit Union's Liquidity Shrinking?
   
 
Credit, an essential balance sheet management tool, is used by credit unions out of both necessity and strategy. Members United Corporate offers a variety of lending products and services designed for and by credit unions. Maintaining a reliable credit relationship ensures that liquidity is available when your credit union needs it, and not a moment later.

Liquidity management is the process of evaluating your credit union’s cash flow needs and determining an effective course of action, so that cash flow needs can be efficiently met. The objective of liquidity risk management is to identify the existence of cash flow strains, measure their extent, identify emerging liquidity pressures, and take corrective measures to minimize any possible disruption of business operations at your credit union.

Three Key Ratios
According to the NCUA, credit unions should be paying close attention to some key ratios, including their:
• Loan-to-Asset Ratio
• Loan-to-Share Ratio
• Capital Ratio
Let’s take a brief look into each of these ratios and what they mean to your credit union.

Loan-to-Asset Ratio
A credit union should strive to maintain a Loan-to-Asset Ratio where it can meet members’ loan demand, and still meet other liquidity needs. High Loan-to-Asset Ratios (e.g., in excess of 80 percent) may indicate that a credit union cannot meet all these needs, especially if other funding sources are limited.

While loan repayments provide the credit union with a flow of funds, these funds are generally reinvested in future loans. If a credit union uses loan repayments to meet other liquidity needs (such as share withdrawals or repaying borrowings), it may not be able to satisfy member loan demand. This could jeopardize the credit union’s reputation, which could result in members turning away from the credit union. 

Loan-to-Share Ratio
The Loan-to-Share Ratio is also a good liquidity indicator. The higher the ratio, the greater the likelihood the credit union will need to obtain external funding sources. Generally, a ratio in excess of 100 percent is indicative of high liquidity risk; therefore, the credit union would need to determine how to best manage its liquidity needs.

Capital Ratio
The Loan-to-Share Ratio is similar to the Loan-to-Asset Ratio but focuses only on the ability of the credit union to fund loans from member and non-member shares. It excludes funding from borrowings and capital. So, a credit union should look at its capital level, and its ability to manage borrowed funds, to determine if a high Loan-to-Share ratio indicates a problem. 

Additionally, if a credit union is relying on short-term non-member shares, it should determine if it can maintain its loan volume in light of the higher volatility of these shares. 

Monitor Your Liquidity
Relying on short-term sources of funds to invest in longer-term loans and investments (greater than one year maturity), can lead to future liquidity and interest rate risk due to duration mismatch. Therefore, all credit unions should carefully and regularly monitor their liquidity levels and develop a liquidity strategy. 

For smaller credit unions, with basic share and loan products, such analyses may be relatively simple (e.g., reviewing the Loan-to-Share Ratio, or amount of cash and short-term investments on hand). Larger, more complex credit unions may need to analyze projected sources and uses of funds, evaluate liquidity alternatives, and determine expected liquidity under adverse economic conditions. 

The NCUA on Liquidity
The NCUA recommends that all credit unions establish at least one source for generating cash or funding liquidity needs outside of normal operations. Typically, a credit union will establish a line of credit with its corporate or another lender (e.g., FHLB). Whatever the source, it should be accessible quickly and at a reasonable cost.
 
Liability liquidity refers to the credit union’s management of its funding sources such as shares, borrowings, and non-member deposits. This includes acquiring funds when needed, obtaining funds at reasonable costs, and structuring the maturities or cash flows of liabilities to reasonably match off against the uses of funds (issuing long-term investments may necessitate obtaining long-term sources of funds). The credit union should be aware of the composition, concentrations, costs, and characteristics of its funding sources. 

According to the NCUA, each credit union should also establish funding options such as borrowings, assets sales, and evaluate them in terms of reliability, cost, maturity, source, and stability. The credit union should have agreements and contracts in place, and should obtain preliminary board approval to conduct such transactions, if necessary.

Preplanned borrowing for a specific purpose or strategy is acceptable. For example, a credit union may borrow on a long-term basis to fund real estate loans. Properly structured, this reduces the liquidity risk (and possible interest rate risk) resulting from funding long-term assets with short-term liabilities. 

The NCUA also looks at the credit union’s management, determines whether they have an established purpose for engaging in borrowing, and that they are complying with legal limits. 

Members United is Here to Help
For your convenience, we have summarized Members United’s competitive credit union liquidity products below.

Members United’s Advised/Term Lines of Credit
Members United offers an Advised Line of Credit to provide advances to your credit union with maturities of one-day to twelve years. A variety of payment terms, amortization periods, and variable or fixed rate options are available.

Features:
• Covers short-term and long-term liquidity needs
• Terms up to 12 years, with varying amortization
• Fixed and variable rates
• Collateral can vary

Benefits:
• Available for liquidity “crunch” or long-term projects
• Flexible terms allow multiple loans under one line of credit
• Credit union can choose rate option that suits their needs
• Loan payment is consistent month to month 
• Collateral doesn’t have to tie up all assets

Jumbo Loans
Members United Corporate’s partnership with Charlie Mac, LLC enables your credit union to offer lucrative jumbo loans (larger-ticket mortgages) to your members. Consider this program to help your credit union reduce interest rate, credit, and liquidity risk. Jumbo loans can also provide an additional way to generate fee income and feature competitive rates, servicing options, and the choice to sell jumbo mortgages individually or in bulk. 

With JumboExpress your credit union can enjoy the potential to:
> access competitive jumbo rates
> provide liquidity for other mortgage demands or lending needs
> meet your members’ demands for a wider mortgage product selection
> attract an affluent market segment
> increase your credit union’s share of the mortgage-lending market
> sell jumbo mortgages on a loan-by-loan basis or in bulk
> provide flexible, custom-tailored options for selling loans
*Choose: 
1) servicing-retained
2) servicing-released with customized brand-name servicing
3) a sub-servicing option
*To qualify as a servicer, certain requirements must be met.