Case Study: Due Diligence Pays Off for Hudson Valley Federal Credit Union

Sponsored by CUNA Mutual Group

When committing to a new investment, due diligence is one of the most important steps of the process. CUES member Scott VanZandt, CFO at Hudson Valley Federal Credit Union, Poughkeepsie, N.Y. ($4.5 billion), was careful to pay close attention to completing his due diligence when entering a benefits pre-funding program.

When the National Credit Union Administration (www.ncua.gov) cleared the way for credit unions to use a broadened array of investments to pre-fund increasing employee benefits costs, VanZandt knew this could benefit his credit union. However, he also knew that no matter how much the credit union’s board of directors valued his opinion on the matter, they would require a great deal more information to commit to such a program. And he was fine with that.

 “Credit unions by nature are risk averse, and when you’re talking about putting your members’ capital at risk through products that credit unions aren’t all that familiar with—things like exchange-traded funds and corporate bonds—there’s some hesitation about taking that leap,” VanZandt says.

When evaluating his options, VanZandt did his due diligence by getting a clear understanding of which investments fit Hudson Valley FCU’s needs and which didn’t. He carefully chose a vendor that provided a comprehensive assessment of the credit union’s needs. “CUNA Mutual Group had us provide our benefit costs and sat down with us to take a look at them as a whole and what they might cost over the longer term,” VanZandt shares. “That exercise really made it apparent that we needed to try to improve our potential for long-term investment growth.”

The next piece of the puzzle for VanZandt was evaluating portfolio managers. CUNA Mutual Group helped with the selection of an investment firm, but VanZandt wanted to be thorough and ensure that this was the best choice. He said it was critical for a portfolio manager to show they understand the unique needs of credit unions.

“We brought [them] into our asset/liability committee. They demonstrated their level of understanding of these types of assets, and their track record of success,” VanZandt says. “They also showed how the level of risk we were taking was appropriate for the size and complexity of our organization. And at the end of the day, the amount we invested was enough to make a difference to our bottom line, but not enough to cause significant damage to the quality of our balance sheet. That balance ultimately allowed us to make the leap.”

Despite the deliberately conservative investment and a volatile market since 2014, over its first two-plus years, Hudson Valley FCU’s benefits pre-funding program contributed approximately $4.2 million to the credit union’s net income.

VanZandt is pleased with the results so far and is satisfied that Hudson Valley FCU made its decision the right way. “CUNA Mutual Group helped us put together a solid package of due diligence, so we’re ready if any of our regulators or auditors question whether we put enough resources, time and effort into making the right decision,” he says.

Important factors when completing due diligence include:

• Working with knowledgeable, experienced partners. Properly vetting your vendor and your investment firm is one of the most important parts of the due diligence process. Make sure that your vendor has a wealth of knowledge and experience in supporting clients throughout the life of the investment. Specific knowledge should include the credit union regulatory environment, emergent accounting standards and the impact of various investment scenarios before the fact.
• Examining and pursuing other available options. To make the best decision for your credit union, it’s important to know your options and have confidence that the choice you’re making will be the most beneficial and least risky for your credit union.
• Including all important parties in the decision. When evaluating benefits pre-funding, VanZandt made sure to include several parties in the discussion and decision, including the CEO and board of directors. It is also important to include HR when investing in executive benefits, as they may have valuable insight.
• Reviewing the plan annually. Due diligence doesn’t stop when the decision is made to pursue an investment. It’s important to re-evaluate your plan and your vendor regularly to ensure that you are still doing due diligence for your members. You should also evaluate your plan in the event of a significant change in your vendor or your investment firm, such as a merger, acquisition or leadership change.

John Moreno is senior executive benefits specialist at CUESolutions Platinum provider CUNA Mutual Group, Madison, Wis. Reach him at john.moreno@cunamutual.com.