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CU Financial Trends … and Future Focus Areas

Brad Dahlman

The credit union industry has seen great change and struggle over the past five years. Starting in 2009, we saw: financial markets collapse; the closure of U.S. Central Federal Credit Union; extensive assessments to strengthen corporate credit unions; significant loan losses; and a sluggish economy. We have been battling our way back from these challenges and are in a much better spot, but it hasn’t been without pain and consolidation. During the past five years, the number of credit unions has shrunk by 1,000. Below are a few charts to illustrate some other key credit union industry financial trends.

Net Income – in 2009 the industry lost money due to high charge-off/provision expense and stabilization costs. In 2013, we had returned to “normal profitability levels” with an industry return on assets of .77 percent.

Net Income

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Balance Sheet – The industry has a strong balance sheet. Over the past five years, we have seen growth (2.54 percent in annual loan growth and 5.66 percent in annual deposit growth). The rapid growth of deposits has created excess liquidity. We did, however, see strong loan growth in 2012/2013 with 6.45 percent average annual loan growth. In the first quarter of 2014 loan growth has continued at a 4.63 percent annual clip. This increased loan demand is encouraging for both the industry and broader economy.  

Balance Sheet

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Revenue Sources – Margin (in dollars) has remained flat over the past five years, while our assets have grown at about 4 percent annually. This means we are making less margin off each balance sheet dollar due to margin compression. The margin compression has been most dramatic over the past two years as the industry has pushed for loan growth. This margin compression should be a concern to credit union directors, since margin represents two-thirds of our revenue. We have seen strong fee income growth over the past five years (4.94 percent annually).

Revenue Sources

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Looking Forward

Now that the financial challenges of the past are largely behind us, where should credit union directors put their focus?

I believe the big challenges facing credit unions are best summed up in the following four areas:

  1. Membership – How do we acquire and retain existing members?
  2. Margin Management – How do we effectively price?
  3. Financial Management – Do we know enough about our branches, products and members’ profitability?
  4. Risk Management – Do we have tools in place to systematically assess and manage risk?

Membership – Membership is the foundation of our industry, but member needs are changing and interactions are changing. Today, members are using self-service transactions 6.5 times more often than visiting our lobbies (see chart below). Additionally, self-service transactions are growing at 10 percent annually and lobby transactions are declining. A key question for a director to ask is: Does our credit union have state-of-the-art alternative delivery channels (website/mobile app/ATM/telephone banking) to attract and retain members? Are we actively promoting them?

Transaction Activity (in Billions)

Transaction activity

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Margin Management – In today’s competitive and low-rate environment, we have seen margin compression. We must be competitive, but can’t simply offer the lowest rate on loans and the highest rates on share certificates. This combination will further erode margin and make us unprofitable. A key question for a director to ask is: Do we have the right tools to effectively set rates to balance competitive pressures and our need to generate an adequate return?

Financial Management – The industry has returned to normal profit levels, but wise credit unions are starting to dig deeper into the financials to understand profit drivers. For credit unions to make wise decisions about their branch network and to make intelligent decisions about product parameters (fees/rates/minimum balances…), we need a better understanding of profit contributions. A key question for a director to ask is: Do we have the tools to make good decisions about branches and products?

Risk Management One of the biggest reasons for the downturn in 2009 was poor enterprise risk management processes. While the largest institutions had the largest unidentified risks, there was a trickledown effect to smaller institutions as the foreclosure crisis and economic slowdown hit all FIs. Now we are seeing increased regulatory expectations for sophisticated ERM systems/process. A key question for a director to ask is: Do we have an accurate and complete assessment or our risks and are we working to mitigate the largest risks?

We are in a far different spot today than five years ago, and for this we should be very thankful. Now you must turn your attention to different issues and ask important questions that will influence the future direction of your organization.

Brad Dahlman is product manager for Jack Henry & Associates, St. Paul. Minn.

Apply it to your Board Room:

  1. How have the key financial trends identified in this article already impacted your credit union?
  2. How is your credit union handling key questions about membership, margin management, financial management and risk management?

Cornerstone Advisors is CUES’ partner in offering enterprise risk management.

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