Pump Up Your Skills To Pump Up Your
Margins
Michigan Credit Union League
Executive Summit
August 31, 2007
Presented by Jared Y. Cahill
National Director of Alliances
877 510-5603
Or
How to Manage in a Challenging
Environment
Michigan Credit Union League
Executive Summit
August 31, 2007
Presented by Jared Y. Cahill
National Director of Alliances
877 510-5603
Agenda
•
•
•
•
•
•
•
Who Moved My Cheese? Coping with Change
Economic/Financial Landscape & Competition
Winning and Competing
Fee Income-The Good, the Bad and The Ugly
Operating Costs-You Can’t Pass on Inefficiencies
Lots of Literature Out There
A Great Tool to Start With
3
Who Moved My Cheese
• A parable or an allegory.
• Coping with Change.
• Navigating the maze.
4
Economic/Financial Landscape &
Competition
Traditional Business Model
 For Profit-the financial statement, not the


philosophy
Income – Expense = Capital, Growth &
Service
Net Interest Income exceeds Operating Expenses
5
The Maze and The Moving Cheese
•
•
•
•
Yield Curve and Rates
ROA and ROA less NII
Net Interest Income v. Operating Costs
Competition
6
All Credit Unions-Margins and ROA
7
Michigan Credit Unions
Margins, Operating Costs and ROA
8
Michigan Credit Unions – Non
Interest Income
9
E-Scan
• “The flattening yield curve has had
negative consequences for most credit
unions’ earnings and capital. Net interest
margin will continue to decrease.”
• “Rising interest rates will reduce loan
demand.”
10
E-Scan
• “A tight labor market could push up labor costs
for some credit unions and increase their rate of
job turnover.”
• “Credit union bottom lines will get squeezed
tighter, requiring some credit unions 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.”
11
E-Scan
• “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.”
• Don’t worry so much about being taxed; worry
about banks (especially the mega-banks) taking
your members.
12
The Competition
Who is your competition?
Other Credit Unions?
Community Banks?
Mega-Banks?
Wal-Mart?
Internet?
13
The New Business Model and The
Competition
How all financial institutions stack up using a
Net Operating Analysis
A new way to analyze the changing business
model. Since net interest income is less than
operating costs, what are the new drivers of
ROA. They are non-interest income v. operating
costs and operating efficiency.
14
Key Points of NOA
1. Trends in ROA & ROE
2. Net Operating Assets
(assets less securities)
3. Non-Interest Income
4. Non-Interest Expense
5. Net Operating Costs
6. Industry & Competitor
Comparisons
7. FTE Efficiencies
15
Net Operating Costs
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
BILLION DN
ALL BANKS
BILLION UP
S&L
HIGH PERF BANKS
CREDIT UNIONS
16
Return on Assets (ROA)
2.50%
2.00%
1.50%
1.00%
0.50%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
BILLION DN
ALL BANKS
BILLION UP
S&L
HIGH PERF BANKS
CU
17
Operating Assets Per Full Time Equivalent
12/31/06
BILLION DOWN
5.00
4.50
MILLIONS
4.00
3.50
3.00
BILLION UP
HIGH PERF
BANKS
ALL US
2.50
2.00
S&L
1.50
1.00
CREDIT UNIONS
18
The Terrain
• Margins are tight and will get tighter
• Margins are market driven
– Very little price elasticity
• Who is your competition?
– Not, “Who are your peers?”
• Consolidations/Mergers drive up the ante
19
The Winning Strategy
• Increase Non-interest income
• Lower Operating Costs
• Grow-New Members and Better Product
Penetration
• Be Competitive
20
Tactics
•
•
•
•
•
Reduce Net Operating Cost
Become Price Competitive
Meet Market Needs
Sell to and Service Members
Grow
• Be Competitive
21
Fee Income
• Is it the Credit Union Way?
• Profits = Capital, Growth, Service.
• Sources
22
Fee Income- The Good, The Bad and The Ugly
• The Ugly-Profits, Member Perception
• The Bad – Board, Management, Staff
Objections
• The Good – Increase Capital, Grow, Provide
Services
• Sources
23
Categories of Fee Income
1.
2.
3.
4.
5.
Deposit Related Income
Loan Related Fee Income
Other Member Related Services Fee Income
Other Operating Fee Income
Non-Operating Income
24
Deposit Related Fees
• Activity/Minimum
Balance Fees
• Overdraft Privilege Fees
• Stop Payment Fees
• Transfer Fees
• ATM Surcharge
• ATM Interchange
Income
• Other ATM
•
•
•
•
•
•
Wire Transfers
ACH Fees
Bill Payer Fees
Returned Check Fees
Check Copy
Money Order/Travelers
Checks
• Monthly Maintenance
• Savings Bonds
25
Loan Related Fees
•
•
•
•
Late Charges
Origination Fees
Credit Card Fees
Skip Payment Fees
26
Other Member Related Fees
•
•
•
•
Check Cashing
Bad Address Fee
Safety Deposit Box
Statement Copy
27
Other Operating Income
• Insurance
Reimbursement
• Check Up-charge
• Check Card Interchange
Income
• Credit Card Interchange
Income
• Loan Servicing Income
•
•
•
•
•
Sale of Mortgages
CDI, CLI and AD&D
Extended Warranty
GAP Insurance
Investment & Insurance
Services
• Trust & Rental Income
28
Non-Operating Income
•
•
•
•
•
•
Investment Services
Insurance Services
Trust Services
Gain/Loss on Assets
Gain/Loss on Investments
Gain/Loss Assets in Liquidation
29
Observations About Current Sources
•
•
•
•
Are you a Bank or a Credit Union?
Which Fees are Acceptable and Which Are Not?
Don’t Just Raise Fees!
Do you have all the services that members are
willing to pay fees for?
30
Increase Non-Interest Income
• Fee Income – lots of sources, but half center
around a share-draft account. Share Draft
Penetration???????
• Product Income – e.g., CDI, CLI
• Prevent profit leaks - Lower waivers and chargeoffs
• New products and services
• Increase cross-sell income
31
Methodology to Increase Fee Income
• Needs Assessment-of
the credit union,
membership and market
• New Fee Income
Programs
• Product Profitability
• Value Pricing
• Setup and Action Plan
• Member relationship
building strategies
• Product linking and
integration.
32
Lower Operating Costs
You Can’t Pass On Inefficiencies in a Hyper
Competitive Market.
Operating Costs and Product Pricing Aren’t in
Separate Silos.
33
Lower Operating Costs
• Capacity has grown at 15% per year and financial
institutions have grown at 8%.
– Feed more members and services in to to soak up overcapacity
•
•
•
•
Improve productivity
Optimize cost of human capital
Reduce costs of new product launches
Reduce FTE expense
34
Process Efficiency
• “… it is all about having the tools and
disciplined capability to map to your processes,
model them as they should be, and monitor
process effectiveness. This whole focus on
process is becoming much more important-not
only for driving efficiency improvements, but
also for driving effectiveness and agility.” Susan
Landry, Managing VP, Gartner, Inc.
35
Methodology to Lower Operating Costs
• Complete workflow analysis
• Improved technology
utilization
• Best Practices
implementation
• Improved systems and
procedures
• Enhanced product design
and profitability
• Revenue potential planning
programs
• Centralized operations and
lending programs
• Expense control programs
• Staffing Studies and salary
administration programs
• Analysis of outsourced
alternative
36
Outsourcing-A New Paradigm
“Our hypothesis is that financial institutions are in the
middle of a transformation from being monolithic and
vertically organized proprietary operations to becoming
parts of a more fluid ecosystem. In other words, a
financial institution does everything now for itself to
serve its customers and we are…moving to a much
more fluid ecosystem where you will have some
financial institutions players who focus more on
customer acquisition/customer servicing and the front
office. These institutions will in the future acquire
most of their products through an outsourcing or
third-party agreement. Susan Landry, Managing VP, Gartner,
Inc.
37
Grow
•
•
•
•
The Best Defense if a Good Offense
Add members
Increase product penetration
Become sales and service oriented instead of
order taking oriented
• Be mindful of the consumerization of your
membership
38
Growth
• Attract new members if your goal is
overall asset growth
– For most there is plenty of room to grow
within their current fields of membership
• Achieve product penetration among
loyal members
39
Average Members-to-Potential
Members by FOM Type
Source: CUNA’s Credit Union Operating Ratios and Spreads
40
Be Competitive
• Not just with your Peers
• But, with banks and other financial institutions
• Increase NII and lower operating cost to
compete in the tight margin environment
41
Growth Options
• Increase Cross-selling Efforts to Current Customers
• Conduct Promotions to Attract New Customers to Existing
Products & Services
• Offer New Products and Services
• Expand Market Area by Opening New Branches in New
Geographic Area
• Open New Branches in Existing Market Area
• Expand Presence on the Internet
• Add ATMs
• Enter Joint Venture/Affiliation (e.g., insurance, real estate,
broker dealer)
42
Products & Services
•
•
•
•
•
•
•
•
•
Home Equity Lines of Credit
2nd Mortgages other than HELOC
Adjustable Rate Mortgages
Non-traditional Mortgages
Reverse Mortgages
Electronic Bill Payment
Cash Management Services
Corporate/Business Credit Cards
Insurance (property and casualty,
health)
• Electronic Bill Presentment
• “Keep the Change” debit or credit
card
•
•
•
•
•
•
•
•
•
•
•
No-Fee ATMs
Health Savings Accounts
Email/wireless Banking Alerts
Stored Value/Prepaid Cards
Online Loan Applications
Asset Management
Remote Deposit
Identity Theft Protection
Credit Report Access
Real Estate Services
Higher Interest on e-Savings
Accounts
43
Winning - The Formula
•
•
•
•
Increase non-interest income
Reduce operating cost
Grow
Be More Competitive
44
Increasing NII
"Increase NII" Project Will Bring Quickest Value
$180
Net Revenue to Customer ($000)
Incr ease NII
Ot her NII
$160
Account Acquisit ion
$140
Sales & Ser vice
Expense Reduct ion
$120
$100
$80
$60
$40
$20
$0
0
Slow
1
2
3
4
5
Speed of Project Com pletion
Fast
45
The New Business Model
46
Challenges
•
•
•
•
•
Financial Terrain is tough
Competition is tough
You can’t change either
You can change your credit union
Begin Now
47
The Over-Riding Challenge
How do you implement the new business model
required by the marketplace in order to survive
and prosper AND STAY TRUE TO THE
CREDIT UNION PHILOSOPLY????
Look to the “Movement”
(Leagues/CUNA/Credit Unions) to guide
management, staff and board.
48
A Tool to Change the Business Model
Since net interest income is less than operating
costs, what are the new drivers of ROA?
1. non-interest income v. operating costs
2. operating efficiency
NET OPERATING ANALYSIS
49
Net Operating Analysis-Credit Union
SAMPLE CREDIT UNION
ROA
ROE
2003
2006*
0.51%
5.75%
0.45%
4.99%
DIFF.
-0.06%
-0.76%
% CHG.
-11.76%
-13.22%
( thousands)
TOTAL ASSETS
INVESTMENTS/INVCASH
NET OPERATING ASSETS
$104,928
$2,248
$102,680
$114,966
$8,056
$106,910
$10,038
$5,808
$4,230
AVG.CHG.
3%
86%
1%
% NET OPERATING ASSETS
2003
2006*
0.80%
0.96%
0.18%
0.22%
0.98%
1.18%
NON-INT. INC.
SERVICE CHARGES
OTHER FEE INC.
TOTAL NON-INT. INC.
$821
$180
$1,001
$1,027
$237
$1,264
$206
$57
$263
NON-INT. EXP.
EMPLOYMENT
OCCUPANCY
OTHER NON-INT. EXP.
TOTAL NON-INT. EXP.
$1,693
$256
$1,698
$3,647
$1,992
$281
$1,859
$4,132
$299
$25
$161
$485
1.65%
0.25%
1.65%
3.55%
1.86%
0.26%
1.74%
3.86%
0.21%
0.01%
0.09%
0.31%
$2,646
$2,868
$222
2.57%
2.68%
0.11%
$2,474
$2,458
AVERAGE SALARY & BENEFIT PER EMPLOYEE
$40,795
$45,793
$4,998
SALARY & BENEFITS PER MILLION OPERATING ASSETS
$16,488
$18,632
$2,144
NET OPERATING COST
DIFF.
0.16%
0.04%
0.20%
Employee Efficiency Analysis
OPERATING ASSETS PER FULL TIME EQUIVALENT
($16)
INCREASE EARNINGS VS
* Figures are based on YTD call report data; December 2006
** High Performance
GROWTH VS
50
Net Operating Analysis-Industry
SAMPLE
CREDIT UNION
DECEMBER
CREDIT
UNIONS
BANKS
**ROA
ALL
YOUR
2006*
DOWN
UP
1.50% +
USA
STATE
USA
0.45%
4.99%
1.03%
9.83%
1.36%
13.36%
2.47%
18.81%
1.31%
12.88%
0.52%
4.76%
0.82%
7.31%
BILLION
%
NET
OPERATING
ALL
CREDIT
UNIONS
BANKS
**ROA
ALL
YOUR
ASSETS
DOWN
UP
1.50% +
USA
STATE
USA
0.96%
0.22%
1.18%
0.47%
1.02%
1.49%
0.45%
2.48%
2.93%
0.48%
4.33%
4.81%
0.46%
2.30%
2.76%
0.85%
0.63%
1.48%
1.09%
0.57%
1.66%
1.86%
0.26%
1.74%
3.86%
2.15%
0.53%
1.44%
4.12%
1.66%
0.45%
1.56%
3.67%
1.82%
0.41%
2.71%
4.94%
1.72%
0.46%
1.54%
3.72%
2.06%
0.31%
1.83%
4.20%
2.14%
0.30%
1.84%
4.28%
2.68%
2.63%
0.74%
0.13%
0.96%
2.72%
2.62%
BILLION
ALL
$2,458
$2,576
$4,334
$3,480
$3,992
$2,534
$2,410
$45,793
$55,358
$71,807
$63,257
$68,609
$52,293
$51,531
$18,632
$21,489
$16,568
$18,176
$17,185
$20,635
$21,383
$56
$2,077
$2,729
$1,842
($40)
$67
$2,139
$280,658
$2,099,244
$191,840
($1,469)
$2,556
51
52
JMFA Net Operating Analysis
53
Doubled ROE
54
Performing ABOVE Average
55
Strong GROWTH in Non-Interest Income
56
Lowered Operating Costs
DECREASED Total
Net Operating Cost
57
Key Takeaways
• Can you compete on
Loan and Deposit
pricing?
• Has your ROA been
dropping?
• You can’t pass on
inefficiencies in a
hyper-competitive
market
• There are competitive
options
58
A Beginning
Free NOA at JMFA.com
• Click on Credit Union
• Click on “Free NOA”
• Fill in the form
• It’s that easy
• Call us for a Free Consultation – Tom Young
at 877 736-9440
59
Resources
• “Trends in Generating Non-Interest Income”-A
CUNA CFO Council White Paper. This has an
extensive bibliography.
• “The Top 100 Credit Unions In Non-Interest
Income”-by Rory Rowland, Callahan &
Associates. Presented at CACUL Annual
Meeting and Convention.
60
You May Be a Merger Candidate
if….
• If you have excess capital…
• If your operating expenses are too
high…
• If member growth is slow or
stagnant…
• If you’re maintaining or cutting
your marketing budget…
• If you’re maintaining or cutting
your technology budget…
• If you’re share-draft penetration is
below 75%...
• If you keep doing the same old
non-aggressive strategic planning
and hoping to get different
results…
• If you say “we’re too small…”
• If you manage using peer group
comparison…
• If your non-interest income isn’t
growing…
• If you don’t understand the
concept of the “consumerization
of members…”
• If you are not actively pursuing
younger members…
• If you think hunker-down is a
good strategy…
61