Margins have grown steadily tighter for all kinds of financial institutions in the 21st century. But recent data shows margins widening slightly for banks, while credit unions continue to feel even more pressure on earnings.
"We tend to be very short on deposits and very long on loans," noted Bob Larson, financial solutions officer for CUNA Mutual Group. "If our deposit rates are rising and we're putting out longer loans, our margins are pressured."
In remarks before CUNA Mutual's Discovery conference, Larson pointed to the pressure from competition in both lending and savings. That competition leads to rate reductions on loans as credit unions seek to capture loans, and higher rates on deposits as CUs aim to also draw dollars.
Credit unions have seen an increase in gross spreads in 2004 to 358 basis points as some loan rates have been adjusted upward, but it hasn't alleviated pressures, as Larson noted that from 1992-2004 the average growth in operating expenses among credit unions was 12%. In 2004, the operating-expense-to-total-income ratio was 55%. "Remember in the 1990s, brick and mortar wasn't the solution. Everyone was going to serve their members electronically," Larson observed. "Now, with everyone moving to community charters, they are building more brick and mortar. And that's the greatest challenge to credit unions-living on less."
"The key today is how can we add value for the members of the credit union" while also managing expenses, said Larson.
For credit unions, the pieces of the financial planning process, said Larson, are (moving from tactical to strategic): member profitiability, product profitability, organizational profitability, budgeting process, ALM, and long-range outlook.
Larson showed his audience data that segmented the typical CU's membership according to profitability. When broken into five segments (commonly categorized as A, B, C, D and E) just two (A and B) are profitable (see related story, page 28).
What is long-range strategic planning? Larson defined it as the process of defining your institutions's goals and objectives and converting them into action plans. The long-range, he said, is five years and is built upon guidelines from the board and senior management in order to provide a "strategic look ahead."
"It allows you to see what you have to do in new business in order to reach your goals," he explained.
Targets in a long-range outlook should include projections for ROA, assets, loan-to-share ratio, locations, and members.
Larson said many challenges are developing in ALM in executing actions to control risks and also reach the credit union's goals. "I think the key part is doing the what-if scenarios and asking, 'what if this event occurs, and what is the impact to the credit union,'" he said. "I think the biggest thing you're seeing with examiners today is they want to know not just what you're doing today but what is your plan for the future. They don't want you to wait until tomorrow to fix a problem."
As an example, he cited indirect lending, where problems often aren't seen until 18 to 24 months out, adding that at a Minnesota credit union at which he worked prior to joining CUNA Mutual had exited indirect lending after seeing related delinquencies.
