Move Away From Margin Management Pays At FNEFCU

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EAST HARTFORD, Conn. — Realizing margin management is not enough anymore to drive the bottom line, First New England FCU has made changes so that 58% of its revenue is derived from non-interest income.

The $70-million credit union actually made its adjustments seven years ago, well ahead of bottom-line pressures facing CUs today, and as a result has come through the recession in better financial shape and with other advantages over others that have not diversified their revenue streams, said CEO Michael Palladino.

The credit union went to relationship pricing and fees, added high-interest checking, jumped in with a mortgage CUSO, and sold its credit card portfolio. Those changes have FNEFCU on track for 1% ROA this year, according to Palladino.

"We have always been a strong lending credit union, always nearly 100% loaned out," stated Palladino. "But in 2002 to 2003 we did not see a big future in margin management because we were losing at the point of sale, especially with auto loans. We do not do indirect or business lending, so it was consumer and retail loans, and with the commoditization of these products from the banks we saw increasing competitive pressure. We just did not see the ability to control our future by simply managing margin."

So First New England diversified, and one of the first steps it took was to generate more revenue and overall product growth through checking. It added Rewards Checking, which paid 3.05% APY at press time for balances up to $15,000 and refunds up to $25 in foreign ATM surcharges. Checking penetration, as a result, has climbed to 55% from 25%.

Rewards Checking requires members take e-services and perform 12 debit transactions per month, which has lifted debit interchange revenue to more than $200,000 annually. "Interchange ramped up dramatically with this account," Palladino explained. "We have three checking accounts, including free checking. But this is by far our most dominant checking product."

FNEFCU's biggest revenue source, according to Palladino, comes from selling off first mortgage loans through local Mortgage Markets CUSO. Palladino said the revenue is "very significant," but chose not to disclose the amount. "It's a fee-based model. We originate and then sell everything to the secondary market and earn fees from that." The credit union portfolios less than one-third of its first mortgages.

Five years ago FNEFCU sold its credit card portfolio to Elan, but did not take the up-front premium, instead signing a contract that allows the credit union to participate in card balance and interchange income during the life of the contract. "We are getting about 3% on the credit card portfolio without significant risk and no significant work," Palladino said. "We get a couple hundred thousand each year from this."

But it is relationship pricing, said Palladino, that is one of the best moves the credit union has made. The CU initiated a list of fees-including $3 for bill payment, $5 for an inactive line of credit, and $10 for loan payoff-but gives members the ability to avoid most by having one of two formal relationships. "Advantage" members must have an aggregate loan/deposit balance of $15,000 plus two of the following four products: checking with direct deposit, a first mortgage or home equity line with a balance, an IRA, or a money market account.

"Evantage" members must have an aggregate loan/deposit balance of $3,000, checking with direct deposit, debit card, home banking, and e-statements, and either an auto or mortgage loan. The move has led to more than 25% of member households being either Advantage or Evantage members. Services per household average 2.05 for general members, 3.49 for Evantage, and 4.12 for Advantage members, noted Palladino, who said profitability and credit scores increase with relationship households.

Some fees members cannot avoid, such as a $20 annul ATM card fee, $29 NSF charge, and $10 for Reward Checking with no ACH or direct deposit.

"We added fees but gave members a way to avoid most of them, and that has not affected service, as some may think happens," Palladino said. "We scored 6.5 out of 7 on our latest membership survey."

Palladino is thankful the credit union began making these changes seven years ago, rather than being forced to make tough choices today. "It gives us a competitive advantage in the market, too. It allows us to look at competitive changes and feel we have the freedom financially to adjust and match the different offerings."

The credit union's net income before NCUA assessments for 2010 was $504,049, putting capital at year end at 7.69%. ROA came in at 74 basis points prior to stabilization expenses and the NCUSIF premium.

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