BYNUM, Ala. - AOD Federal Credit Union lies midway between Birmingham and Atlanta, in east central Alabama, an area with moderate growth and low unemployment.
The moderation in the local economy, however, is belied by the growth AOD FCU has experienced since Kenneth Reynolds took over as CEO in mid-2004. Since that time, the credit union has more than doubled its return on assets (ROA).
"We've had a full plate these last few years," said Reynolds. "Our starting point when I became CEO was implementing a solid strategic planning process and reviewing every product and area of our operation."
With a 1.88% return on assets (ROA) during 2006, AOD FCU was the 18th-highest performer among the 656 credit unions in the $100 million to $250 million in asset range (which collectively returned .72% during 2006). Started in 1950 to serve the employees of Anniston Ordnance Depot (AOD), today the credit union has $144-million in assets and serves nearly 23,000 members from 250 select employee groups (SEG).
Reynolds was well-prepared to head a credit union, having served as president of several banks and as an FDIC regulator before arriving at AOD 10 years ago as COO, his first credit union experience.
Since his 2004 promotion, and following an initial strategic assessment, some of the projects Reynolds has overseen include a core system conversion, implementation of risk-based loan pricing, an evaluation and revamping of all delivery channels, a product and market analysis, and the implementation of structured asset liability management (ALM) measurement and modeling practices.
Collectively, these projects have boosted earnings through both higher net interest margins (to 3.40% of assets in 2006 from 2.85% of assets in 2004) and lower net operating expense levels (to 1.95% from 2.07% of assets for the same periods). "Our risk-based pricing approach has allowed us to improve both our loan yields and credit quality at the same time," noted Reynolds. "Our cost of funds is kept in line by focusing on lower cost checking and regular shares."
The credit union's .56% delinquency-to-total loans ratio at the end of 2006 was well below the .75% average for its NCUA peer group, falling further to .27% at the end of June. At the end of 2006, checking and regular shares represented 71% of deposits compared with an industry average of 42%. Correspondingly, the cost of funds for AOD FCU has risen only .14% since 2004, compared with an NCUA peer group increase of .90%.
"We've become very disciplined in modeling our balance sheet and interest rate sensitivity," conveyed Reynolds. "Our margin is well insulated from changes in market rates-both our loan and deposit mix is shorter duration from a market repricing standpoint."
Asset liability modeling is performed internally using the Jack Henry ProfitStar solution-also used for long range strategic planning and annual budgeting.
"Our disciplined strategic planning process is one of the most important things we do; we are getting really good at setting goals, modeling our balance sheet and generating multiple year business plans," continued Reynolds. "It's critically important."
Operating Expense Improvements
Net operating expense improvement has been driven through a combination of factors. "We implemented our Paid NSF program internally, making it more profitable than using a third party. Additionally, we have been very successful with our debit card program," said Reynolds.
Those programs have pushed fee income levels to $2.57 million in 2006 from $1.24 million in 2004. Debit card penetration has increased to more than 82% of checking account-holders today from 54% of checking account-holders at the end of 2004. Debit card transactions have risen to 1.7 million per year-now higher than the numbers of check transactions processed annually.
Gross operating expense ratios at AOD FCU are 3.79% of assets (compared with a peer average of 3.86%).
"The efficiencies with our new core system implemented in early 2005 are apparent," said Reynolds. "We now have customized workflow ability making transaction processing more intuitive while lowering both the time we spend training and correcting errors."
Member Satisfaction
Monitoring transactions and member satisfaction on the front line is another important initiative.
As part of the ongoing quality monitoring process, a Quality Service Manager position was created to assist front line positions with continual service skills refinement. Results are achieved through formal benchmarking and quality measurement processes with monthly feedback provided.
AOD FCU's market and delivery channels analysis brought further improvements. With members in 45 states as well as several foreign countries, the importance of electronic services is readily apparent.
In addition to understanding the limitations with having only four locally available branches Reynolds noted, "we looked carefully at our electronic delivery channels. We have added ATMs and incorporated skills-based call routing into our telephone banking-and will continue to add to our Internet banking capabilities." Shared branching was recently added to further insulate members from the potential impacts of a storm-related disaster.
Today, with more than 20% of members using Internet banking, important enhancements have included providing all e-channel services for free, the addition of single-sign-on, and the addition of e-statement and e-check viewing. A revamped website will be introduced later this year.
SEG development will continue to be a major focus. With two individuals devoted to marketing and acquiring new SEGs and organically growing existing SEGs, Reynolds expects to add 25 SEGs per year over the next several years.
A complimentary strategy will be the introduction of full business banking products and services in 2008.
Future Expansion Plans
Reynolds knows future expansion plans will drive up costs and lower the credit union's ROA, but he also believes there is a payoff.
"We know innovation and enhancement takes resources. Our commitment is to our members and we are investing for their future returns. We are fortunate to have an outstanding group of volunteer board members at AOD. The management group here is well-trained and hard-working. They work long hours and respond well to new initiatives to help us improve service for members and to make us more effective and efficient in our operations," Reynolds said. (c) 2007 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com
