Excerpted from an article in Callahan's 2004
Credit Union Directory by Jay Johnson.
Mr. Johnson is the Executive Vice President of Callahan & Associates, Inc
The historically low interest rates of the last two years have created new
opportunities and threats for the credit union system. Low rates have helped
members save money when refinancing mortgage and consumer loans. But captive
auto finance companies have offered 0% new car financing options, effectively
eliminating credit unions from crucial segments of this market. In addition,
while credit union mortgage activity is growing rapidly, it accounts or only
2.5% of US mortgage loan volume.
Falling rates have created investment gains in securities held in portfolio
but also caused faster paydowns on many others. The average investment portfolio
yield is only 2.7% for the first six months of 2003. Credit unions have a strategic
advantage versus money market funds because of their mix of earning assets.
But members are not as interested in the rate game with short-term returns falling
The new era of low rates has accelerated the decline in the net interest margin
thereby creating more reliance on service income. Operating expenses continue
to grow at double-digit rates while total revenue is falling. Total income declined
3.1% in the first 6 months of 2003 versus the same period last year. Productivity
and efficiency innovations have become critical management priorities.
The low interest rate era has forced credit unions to rethink how to provide
enhanced member value. One approach has been to rely more extensively on cooperative
solutions to achieve scale and spread the risk of new ventures. The emergence
of the multi-owned CUSO in recent years has been an important milestone in the
evolution of the credit union system. Their strategic intent is to achieve scale,
diversify risk and create an advantage for the owners that they cannot achieve
through individual efforts. Usually formed around a single business concept,
these multi-owned CUSOs can develop expertise and market reach that no single
credit union could possibly accomplish.
As credit unions look to 2004, a key question will be what lessons have been
learned from this low interest era. Credit unions still hold a very small portion
of the assets of financial institutions. Their 6.4% share at June 30 was only
0.7% higher than ten years ago. New thinking and business tactics will be necessary
if the credit union system is to grow out of the narrow foothold in its key
consumer loans and savings markets. The key to a breakout strategy will be credit
unions' ability to deliver superior member value.
This article is excerpted from Callahan's 2004
Credit Union Directory. This year's edition provides the foundation for
re-thinking the challenges facing credit unions today by
- Providing insight on market sectors that can greatly influence a credit
union's growth: performance benchmarking, data processing, CUSOs and auditing
- Showing credit unions what they can accomplish by highlighting leaders in
over 20 performance categories, rather than focusing on averages.