FINANCIAL FEATURE: Tight Credit Union Margins Getting Tighter, Says JMFA Exec; Consultant Advises Florida Credit Unions on Survival in Low-Margin Environment

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Jared Cahill, National Dir.-Alliances, John M. Floyd & Associates, Houston, shared strategic tips on responding to tightening profit margins with attendees at the Annual Convention & Exposition of the Florida Credit Union League in Orlando on Thursday. Florida has about 229 credit unions with assets of $35.6 billion. Cahill discusses recent negative trends -- decline in asset and liability pricing and stiffer competition. He cites CUNA Escan stats and notes a need for greater emphasis on fee income, sharing specific suggestions for improving non-interest income. He advises C.U. managers to improve productivity; to optimize cost of human capital; to reduce costs of new product launches and to reduce full-time equivalent expense.

A leading financial consultant shared strategic tips with Florida credit union executives today on how to respond to tightening margins.

Jared Cahill, National Director of Alliances for John M. Floyd & Associates, Inc. (JMFA) of Baytown, TX (near Houston), addressed a breakout session at the Annual Convention & Exposition of the Florida Credit Union League (FCUL) in Orlando (June 14-17). He spoke on “How to Survive in a Low-Margin Environment.” (Cahill Photo:

JMFA, an FCUL Endorsed Partner for its full range of products and services, was one of the official sponsors of the meeting – themed “Shake…Rattle…Roll.” The event attracted more than 1,200 credit union managers, board members and industry vendors, (JMFA at Booth # 400.)

The Florida League represents more than 4 million consumers (member-owners) who receive all or part of their financial services from Florida’s credit unions. At the beginning of 2005, there were about 229 credit unions in Florida with assets of $35.6 billion.

Credit Union Competition & Survival

Cahill took his audience on a financial tour, noting that the Treasury yield curve has flattened, which portends tighter margins for credit unions.

“If short-term rates eventually exceed long-term rates, an inverted yield curve is produced, which can be detrimental to the overall health of the economy. A recession will typically follow by about nine months. Additionally, rising interest rates reduce loan demand.

“Margins are getting tighter; asset and liability pricing elasticity is declining and competition is getting stiffer,” stated Cahill. “As short-term interest rates rise, credit union bottom lines will be squeezed ever more tightly, requiring some of them to reshape their asset/liability portfolios, to boost non-interest revenue and to invest in developing a sales and service culture that better markets and cross-sells products and services to their members and potential members,” he said.

Cahill is a former vice president of the Credit Union Assn. of New Mexico subsidiary that

develops, markets and manages fee-based services to that state’s credit unions. He also organized, chartered and managed the community-based Saguache County Credit Union in Crestone, CO from 1994-2000. He previously provided merger, acquisition and consulting services to mid-market companies and individuals, was a V.P.-Commercial Lending for MBank Dallas, N.A., where he managed a $300 million commercial loan portfolio.

Bottom Lines Need Fee Income

“One of the specific challenges in the past six or seven years has been the ability of spread income to generate a positive bottom line,” he observed. “In other words, credit unions have experienced an increasing reliance on fee income to break even. From 1990 to 1997, return on assets (ROA) less non-interest income ranged from about 0.2 percent to 0.6 percent. However, since 1998, ROA less non-interest income has been very close to zero, and in both 2003 and 2004 was actually negative by -0.2 percent.

“Based on the economic outlook and rate trends for the past two economic expansions, credit unions may be looking at an average reduction in their 2005 ROA of 46 basis points or 0.46 percent,” Cahill concluded.

Quoting from CUNA’s 2005-2006 Credit Union Environmental Scan (Escan), the leading strategic planning resource for the credit union movement, he stated: “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.”

Cahill suggested that credit union executives should be “less concerned about peers and more anxious about competitors. And consolidations and mergers are only driving up the ante,” he added. “To survive and thrive, credit unions must increase non-interest income, lower operating costs, grow and be competitive,” he emphasized. Surprisingly, Escan reported only about 69% of credit union CEOs surveyed rank “increasing fee income” as “critical” or “very important.”

Cahill advised a concerted effort to increase non-interest income (NII) by enhancing fee income, such as an overdraft privilege program. Seek product income from such sources as Credit Disability Insurance and Credit Life Insurance. Prevent overall performance leaks by lowering fee waivers and charge-offs. Add new products and services, and increase income by cross-selling more products to every member encountered.

Operational, financial and delivery systems re-engineering should be re-evaluated, he said, noting the JMFA expertise. The firm also is recognized nationally for its training, incentive and earnings enhancement programs, as well as its product, service, pricing and technology improvement consulting services.

CUNA’s Center for Research & Advice Escan reports that overall, only 48% of credit unions have such fee income-producing, overdraft privilege programs.

“A project to increase non-interest income will bring the quickest value,” he asserted. “Studies show it is faster than account acquisition, sales and service or expense reduction projects.

Credit unions, which have grown capacity at about 15% a year while growing only 8%, can lower operating costs by attracting more members and services to soak up over-capacity,” he said.

To succeed in a low-margin environment, credit unions and their leadership also can work harder to:

  •     Improve productivity;
  •     Optimize cost of human capital;
  •     Reduce costs of new product launches;
  •     Reduce full-time equivalent expense.

“The financial terrain is tough; the competition is tough, and you can’t change either one,” Cahill conceded. “But you can change your operating style, your commitment to growth and to member services. And those efforts will have an immediate and flattering impact on both your short-term and long-term performance.”

About JMFA

JMFA, a leading provider of non-interest income products for more than 30 years, has provided performance improvement programs in more than 2,000 financial institutions, adding billions of dollars in increased pre-tax earnings for clients in 49 states and Central America. The firm has implemented more than 1,000 variations of its JMFA OVERDRAFT PRIVILEGE®, and is a strategic alliance provider for CUNA Strategic Services and more than 20 state credit union leagues and associations for the program.

About FCUL

The Florida Credit Union League is a Tallahassee, FL-based statewide trade association offering a myriad of dues-supported services to its members, including education and training, political action, compliance support, information and more. The League also provides access to a variety of financial services-related products through their wholly-owned subsidiary the FCUL Service Group, Inc.

JMFA OVERDRAFT PRIVILEGE® is a registered trademark of John M. Floyd & Associates, Inc.


Jared Cahill, National Director of Alliances, John M. Floyd & Associates, 800-809-2307,,

Preston F. Kirk, APR, Kirk Public Relations, Austin, TX, 830-693-4447

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Preston F. Kirk, APR
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