Financial trends squeeze credit union margins; JMFA executive offers competitive tactics
TCUL members learn critical, tips to survive in low-margin market
GALVESTON, TX (April 20, 2006) – Profit margins are getting tighter; asset and liability pricing elasticity is declining, and competition is getting stiffer, a leading financial consultant warned credit union executives today (April 20). Jared Cahill also offered tips and tactics for survival and growth in today’s demanding marketplace.
Cahill, National Director of Alliances for John M. Floyd & Associates, Inc. (JMFA) of Baytown, TX, (near Houston), spoke on “How to Survive in a Low-Margin Environment.” An estimated 700 credit union managers and board members are attending the four-day Annual Meeting of the Texas Credit Union League (TCUL) in Galveston, TX.
JMFA, the TCUL Preferred Provider for overdraft privilege (courtesy pay) programs, was one of 13 official sponsors of the 72nd annual meeting – themed “Uncommon” – which attracted about 70 exhibitors. The League represents more than 600 of the state’s credit unions, which in turn are owned by more than 7 million consumers.
Cahill took his audience on a statistical tour, noting that long-term interest rates on Treasuries declined from June 2004 to May 2005. “If short-term rates eventually exceed long-term rates, an inverted yield curve is produced, which can be detrimental to the overall health of the economy. A recession will typically follow by about nine months. Additionally, rising interest rates reduce loan demand.
“As interest rates rise, the vise on credit union bottom lines will squeeze ever more tightly, requiring some of them to reshape their asset/liability portfolios, boost non-interest revenue and invest in developing a sales and service culture that better markets and cross-sells products and services to their members and potential members,” he explained.
Cahill is a former vice president of the Credit Union Assn. of New Mexico subsidiary that develops, markets and manages fee-based services to that state’s credit unions. He organized, chartered and managed the community-based Saguache County Credit Union in Crestone, CO (1994-2000). He previously provided merger, acquisition and consulting services to mid-market companies and individuals, and from 1980-88, was a V.P.-Commercial Lending for MBank Dallas, N.A., where he managed a $300 million commercial loan portfolio.
“One of the specific challenges in the past six or seven years has been the ability of spread income to generate a positive bottom line,” he observed. “In other words, credit unions have experienced an increasing reliance on fee income to break even. From 1990 to 1997, return on assets (ROA) less non-interest income ranged from about 0.2 percent to 0.6 percent. However, since 1998, ROA less non-interest income has been very close to zero and has actually been near -0.2 percent in both 2003 and 2004.
“Based on the economic outlook and rate trends for the past two economic expansions, credit unions may be looking at an average reduction in their 2005 ROA of 46 basis points or 0.46 percent,” Cahill concluded.
Quoting from CUNA’s 2005-2006 Credit Union Environmental Scan (E-Scan), the leading strategic planning resource for the credit union movement, he stated: “Strong core deposit competition from banks and other non-bank financial institutions will lead to additional pressure on funding costs during this rising rate environment.”
The consultant suggested that C.U. executives should be less concerned about “peers” and more anxious about “competitors.” “And consolidations and mergers are only driving up the ante,” he added.
To survive and thrive, credit unions must “increase non-interest income, lower operating costs, grow and be competitive,” he emphasized. Surprisingly, only about 69% of C.U. CEOs surveyed rank “increasing fee income” as “critical” or “very important.”
Cahill advised a concerted effort to increase non-interest income (NII) by enhancing fee income, such as an overdraft privilege program. Seek product income from such sources as Credit Disability Insurance and Credit Life Insurance. Prevent profit leaks by lowering fee waivers and charge-offs. Add new products and services, and increase income by cross-selling more products to every member encountered.
The CUNA Center for Research & Advice reports that only one-third of credit unions with assets in the $1 million to $20 million range have a courtesy pay or “bounce protection” program; 53% in the $20-$50 million range; 75%, $100-$500 million; 85%, $500 million in up. Overall, only 48% have such fee income-producing, overdraft privilege programs.
“A project to increase N-I-I will bring the quickest value,” he asserted. “Studies show it is faster than account acquisition, sales and service, or expense reduction projects.”
Credit unions, which have grown capacity at about 15% a year while growing only 8%, can lower operating costs by attracting more members and services to soak up over-capacity, he said. “To succeed in a low-margin environment, credit unions and their leadership also can work harder to:
Improve productivity;
• Optimize cost of human capital;
• Reduce costs of new product launches;
• Reduce FTE expense.
“The financial terrain is tough; the competition is tough and you can’t change either one,” Cahill conceded. “But you can change your operating style, your commitment to growth and to member services. And those efforts will have an immediate and flattering impact on both your short-term and long-term profitability.”
About JMFA
John M. Floyd & Associates, a leading provider of non-interest income products for more than 30 years, has provided performance improvement programs in more than 2,000 financial institutions, adding billions of dollars in increased pre-tax earnings for clients in 49 states and Central America. The firm has implemented more than 1,000 variations of its JMFA Overdraft PrivilegeSM, and is a preferred partner of CUNA and more than 20 state credit union leagues – for the product.
About TCUL
The Texas Credit Union League, organized in 1934, the TCUL provides credit unions with resources, products, services and programs to meet present and future challenges. These include education and training, lobbying activities, regulatory/compliance and technical assistance, research and new product development, marketing ideas and public relations resources.
JMFA Overdraft PrivilegeSM is a service mark of John M. Floyd & Associates, Inc