Just what is the bottom line? That all depends on which line you're toeing. Attend any gathering of marketers, and the bottom line is marketing. Hang with a group of HR execs and in short order you'll learn the bottom line is people. The IT department? The bottom line is technology.
It's the credit union CEO who has the most complex of challenges when it comes to the bottom line, first, because they are multiple and second, because of the unique nature of the credit union business model. At first blush the issue might seem quite simple: for the CEO the bottom line is income minus expenses at the end of the fiscal quarter or year, which may be why so many CFOs are selected to become CEOs.
But as most effective CEOs come to learn, there are different grades of lead that can be used when recording entries in the CU ledger depending on how the CEO prioritizes priorities, including marketing and personnel and technology. Each of those disciplines also brings with them certain values that are abstract; these are the types of things for which you often hear, "you just can't put a price on it." The credit union's "brand" is likely the best example. Members can't describe it, but they know what it is when done well, and they value it above all else. It's the soup of service and pricing and touchpoints and hours and knowledge and marketing and operations and, what one credit union once told me is even the "aroma" of the branch, that are all tangibles intangibles that are components of the bottom line, and which the best leaders learn to identify and foster.
But no matter how sweet or welcoming the aroma of a branch, none of the above matters if the balance sheet smells. In this issue of The Credit Union Journal, we take an extended look at the numbers and the bottom line in a report that begins on page 13. There has been a murmuring in some circles, shouting in others, about the steady decline in margins at most credit unions, and the bottom line is certainly undeniable. The last year the credit union community's average ROA was above 100 points was 2002. The old 1% ROA rule of thumb has been given the thumb, and at year-end 2005 industry average ROA had dropped to 85 basis points. It slid to 81 BPs at the end of the first quarter.
One wonders if some aren't taking the whole "not-for-profit" thing a bit too seriously, especially since what positive margins remain are due in large part to fees and other income. Without those, and the credit union movement's average ROA at year-end 2005 is a negative 40 basis points. "Many credit unions are living on fee income," observed Jeffrey Farver, president of San Antonio FCU, who added that fees have become the "crack" of financial institutions.
Identifying what's driving down average ROA isn't that difficult: the only thing rising as steadily as the cost of funds is the number of outlets looking to loan money to consumers. There are regulatory imbalances. Some credit unions only hurt themselves with their pricing decisions. Young members aren't joining and growth is flat. Far less simple is identifying what to do about it, as the nearly 20 analysts and CEOs interviewed for The Credit Union Journal's report make clear.
What do you think? Is this latest downturn just part of the cyclical nature of financial operations? What is your credit union doing? What would it like to do? We encourage and invite your input and ideas; take a moment to e-mail me at fdiekmann
In Other Notes From Around Credit Union Land...
Ever heard someone confronted by a particularly difficult situation use the expression, "That's harder than robbing Fort Knox"? Perhaps not. A few weeks back a robber entered Ft. Knox, the federal credit union, with a handgun and exited through the backdoor with an undisclosed amount of cash....Lois Kitsch, who has spent considerable time abroad in both the Philippines and Afghanistan helping to get credit unions started and/or growing, was in San Francisco recently talking about the REAL Solutions program she is heading up for the Filene Institute. Among her observations: A low-income person who uses a program pioneered by Ohio's Day-Air Credit Union for payday loans will pay $78 in fees vs. approximately $1,200 at a payday lender for the same amount....Observed by Terrence Roche, a technology consultant with Cornerstone Advisors, at that same meeting in San Francisco, "Pulling off a core system conversion is like pulling off a Band-Aid. You want to do it quick, not slow." Roche later added, "The No. 1 reason credit unions change a core system by a landslide is that management at the credit union doesn't trust the core vendor any longer."
...I listened to a group of volunteers recently as they discussed the in's and out's of hiring a new CEO. It was quickly apparent that a CEO search can divide a board, with one volunteer observing, "Going through a CEO search is like going through heart surgery with no anesthesia." For credit union boards made up of career teachers or government workers, some of the salaries and deferred bonuses that must be offered CEO prospects in order to be considered competitive are shocking to them, with one person noting, "It's more money than many of the board will see in their lifetimes." That led one volunteer to recall, "I remember when our CEO retired after 50 years, and our biggest argument was whether to give her a $450 camcorder, or a trip to DisneyWorld."
Frank J. Diekmann is Publisher of The Credit Union Journal and can be reached at fdiekmann
