As the market changes, and becomes faster paced and more competitive, most credit unions have been hunting for ways to increase their noninterest income. Executives can't just snap their fingers and make loan growth happen, so the typical solutions are to increase fees or lower underwriting standards to drive business, both of which have their own drawbacks. Even with its challenges, pre-funding remains a great option for credit unions looking to improve their income statements without taking on undue amounts of risk on their balance sheets. With a little forethought and the right team of advisors, any credit union can set up a high-quality pre-funding plan and help give themselves a little more breathing room at the end of the year. To get started, keep these three simple principles in mind:

Diversification: This doesn't mean buy four different mutual funds that all invest the same way. Build a smart, conservative allocation, paying attention to the various types of risk. If you're using mutual funds and ETFs, understand what their holdings are and how they fit in with the rest of the investments.
Focus on Total Return: Don't sacrifice quality to get an unsustainable dividend, because a market pullback of 20% can wipe out an entire quarter's worth of gains now. Instead, focus on downside protection, earnings quality and sustainability to achieve the consistency to meet investment goals over the long term.
Quantify the Credit Union's Goals: Run an analysis for the credit union that looks at all the costs of the various employee welfare benefit programs. Discuss, possibly with an advisor, what a reasonable return expectation is and how much risk the credit union is willing to take on. Determine a total funding amount and start smaller than that – a pre-funding plan doesn't need to be bundled into life insurance or some other product, so the credit union can start small and add to the plan freely. Save all the emails and notes from meetings to present to your auditors upon request.

These three bits of advice will get a credit union executive well on their way to creating an effective pre-funding program that will help their credit union knock it out of the park in terms of income and stay well ahead of the pack in terms of investment performance.

Instant Insights /

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