NEW YORK–Ideas around how credit unions can take a collaborative approach to expense management were shared here.
During a session at the CUNA Finance Council annual meeting here, two people shared trends in expenses at CUs—including of different asset sizes—and shared some examples of credit unions that have come together to reduce expenses.
The session was led by Jay Johnson, a partner with Washington-based Callahan & Associates, and Sam Taft, AVP-analytics with Callahan.
Overall Trends
Prior to probing deeper into various expense-management issues, Taft addressed a number of overall industry trends that are contributing to the numbers, including:
- For the first time since 2014, credit unions saw loan volume contract during Q1. The primary drivers of the slowdown are first mortgage production (about 25% of origination portfolio) and consumer lending. Indirect lending has also slowed, he said.
- Over the last six years there has been a general slowing of lending, but Taft reminded that an 8% loan growth rate remains strong.
- Strong deposit inflows were seen in Q1, primarily driven by certificates, including $55 billion in the first quarter. Taft said some CUs have also repriced money markets in an attempt to attract funds.
- The loan-to-share ratio at Q1 at 82.3% and has increased steadily since Q1 2014.
- Cost of funds rose faster than loan yields during the most recent two quarters. Credit unions also saw the narrowest gap between net interest margin and operating expense ratio, at one basis point (3.12 vs. 3.11), that has been seen in some time.
- Industry ROA approached 1% in Q1
- The CU net worth ratio stood at 11.1% as of March 31.
How Are You Doing?
When Johnson asked a breakout session, “How do you think credit unions are doing?” no hands were raised indicating they believed things were going better than planned, with the majority of the room saying performance is about what was projected.
“There are a lot of very good fundamentals,” said Johnson. “Member relationships continue to strengthen. We are starting off the year on a good note.”
Trends in CU Operating Expenses
Looking at operating expenses since 2008, when the U.S. began to come out of the recession, over those 10 years operating expenses have risen 58%. “Expense management was a real focus going into 2010 and into 2014. And then it started to change,” said Johnson. “As loan growth began to pick up in 2015, with three straight years of double-digit growth, revenue started to pick up and we saw a little more loosening up on the expense side, and most of that is around talent.”
Indeed, looking at the components of operating expense, salaries and benefits represented nearly half, reported Johnson. Of $16 billion of increased operating expense in 2018, about $9 billion was in personnel costs.
In 2008, 47% of operating expense went toward salaries and benefits; today it is 50.9%. The next fastest growing category was professional expenses, such as outside consultants, now at 8.2% of all expenses.
Revenue & Expense Growth
Meanwhile, revenue growth has outpaced expense growth, shared Johnston. From 2008-13, there were five straight years of declines in revenue growth, as rates declined. That began to change as lending took off in 2014 and beyond. Sixty percent of revenue today is accounted for by expenses.
Assets have grown faster than operating expenses over the last decade, although in the last year operating expense growth has exceeded asset growth, said Johnson. “Credit unions have done a very good job relative to expense management.”
Perhaps not surprisingly, expenses have grown faster at larger credit unions (those $10 billion in assets and above), although that depends on how the numbers are sliced.
“On one hand you could say smaller CUs have been more effective at managing expenses relative to larger credit unions. But there is other context here, as the growth of those smaller CUs is very different from those larger credit unions,” said Johnson.
But looking at the data in a different way, expense ratios have improved most at smaller credit unions over the past decade, with every peer group demonstrating efficiencies.
And yet another perspective: larger credit unions spend less per dollar of revenue earned, 45.8% among largest CUs, versus 75.5% among those CUs $100 million in assets and below. Smaller CUs spend relatively more on operations and service providers. A much bigger percentage of the budget goes to professional services at the smaller CUs, as well.
Ways CUs Have Joined to Manage Expenses
At a high level, there are three ways for expense management to happen: Utilize excess capacity; gain scale efficiencies, and generate higher revenue from expenditures, noted Johnson and Taft. Here are a few examples they shared:
Utilize Excess Capacity
Taft pointed to First United Credit Union in Grandville, Mich., with about $38 million in assets, which had excess capacity. It worked to create a crowd-sourced staffing model and partnered with two local CUs to share frontline staff for planned absences and other needs. Employees remain on First United’s payroll, and the other two CUs both run the same core system. The credit unions reached legal agreements to clarify all issues, with the insurance risk allocated appropriately.
All new employees are cross-trained on all systems. The result: employee spend dropped as a result during the shared employee period.
Another example: State Employees CU in Raleigh, N.C., which runs the backoffice, operations and core system for Local Government Employees FCU in North Carolina, which launched in 1983 and serves municipalities across the state. LGEFCU members also use SECU’s branches It has since grown to more than $2 billion in assets. LGEFCU pays a percentage of its income to SECU.
“Trust is a huge, huge part of any relationship like this,” said Johnson.
Gain Scale Efficiencies
As an example of three CUs that have joined together to gain scale efficiencies, Taft pointed to Bethpage FCU, Bellco, and SECU Maryland, which formed Open Technology Solutions to drive down technology costs in 2003. It now serves as a centralized core platform running Fiserv DNA.
“The cost savings have been in the millions of dollars for each credit union,” said Taft. “The model has been scale and standardize. In aggregate, they represent $17 billion in total assets, which allows them to get much better pricing on other services.”
Since launch, the three CUs have since created another CUSO, Shared Service Solutions, which supports deposit operations, real estate lending, consumer lending, collections and call center operations.
Taft said all three institutions since launch of Shared Service Solutions has seen a marked decrease in operating expenses.
What Data Show on CUSOs
Overall, Johnson said Callahan & Associates has found that on a per-member basis, expenses are about $34 higher per member at CUs that have CUSOs vs. those that don’t. But that’s not the whole story, he said, noting the data also show that credit unions with CUSOs average $120 more in revenue per member over CUs without a CUSO relationship.