By Lorrie Wohlfeil
How can your credit union achieve the recommended level of net yield in 2016? It’s all about taking big risks to secure big profits. But how do you ever get your team comfortable in taking on such risk? These tips will help you and them feel more at ease.
The last few articles we have written at Lending Solutions Consulting, Inc. have focused on profitability for credit unions.As prefaced previously, we believe measuring and achieving strong net yield may be the most critical determining factor in producing strong earnings.
Your recommended net yield, which is defined as gross yield minus charge-offs, is 6.5 percent or higher. Attaining this level requires some key factors all working for the greater good of the credit union.These factors include the following:
- Appropriate pricing according to risk and FICO with six tiers and a spread of 13 to 15 percent between your highest and lowest tiers
- Healthy amount of unsecured loans and credit cards that comprise approximately 15 percent of your total portfolio
- Appetite for risk with the following breakdowns:
- A+/A = 35 percent
- B = 30 percent
- C = 20 percent
- D/E = 15 percent
Bullet points numbered two and three both create challenges for credit unions.They require an appetite for risk and a comfort level with loans that carry greater risk (e.g., debt consolidation loans).Credit unions’ strongest yielding products include any unsecured loan product and C, D and E auto loans, where up-charging occurs for terms and loan to values.What do these products all have in common?Risk, risk and more risk.We will explore how to get your staff more comfortable with taking these types of risks in this month’s article.