CUs Cut Costs as Margins Shrink

 How can your CU grow and cut expenses at the same time?

February 1, 2012

The financial world is changing fast. Positioning for the future is critical in this competitive environment.

At the same time, budgets are tight because of the recent recession and slow recovery. Every line item on the expense budget is likely to be scrutinized to keep costs down, keep member satisfaction up, and maintain a competitive advantage.

Operating in a holding pattern usually won’t move the vision of a more efficient organization forward. The key, CEOs agree, is determining where your credit union wants to be in the future and streamlining its structure as much as possible.

Optimizing technology

The financials were less than healthy at $544 million asset National Institutes of Health (NIH) Federal Credit Union, Rockville, Md., when Juli Anne S. Callis, president/CEO, came on board three years ago.

“We’ve increased assets and membership, and our operating budget is approximately $500,000 less than it was two and a half years ago,” she says. “We also grew our assets more than 30% in less than two years.”

To some extent, the credit union reinvented its structure to obtain these results, says Callis. “Within the past two and a half years we custom built the credit union to serve the biomedical and health-care industries, and to best address the financial needs of such professionals in Maryland, Virginia, West Virginia, and Washington, D.C.”

Callis had the board’s full backing in repositioning the credit union to cut costs and make it more efficient. “It takes vision and courage to make big changes to a 70-year-old organization,” she adds, “but that’s what we did to make big gains into the ‘real world of retail banking.’”

During the past 24 months, NIH Federal retrenched to maximize technology use and to cut costs and expand services. Examples include installing new state-of-the-art ATMs, transitioning to paperless branch transactions, and outsourcing the call center while expanding live service to 24/365.

Banking solutions and products for biomedical and health-care professionals include free use of any ATM in the world, Physician’s Advantage Business Loans, and cash-back options on the free Platinum Debit Rewards card. Also in development is a unique program to help young biomedical professionals refinance burdensome nongovernment education loans.

The credit union also has taken a hard look at its credit card portfolio. “This is one area where we concentrated on loss reduction, by merging technology and outsourcing programs that include credit card, debit card, and ATM vendors,” says Callis. “The bottom line: By paying for best practices from providers we’re saving money.”

NIH Federal is currently launching a knowledge-based service solution which employs cloud technology. This will further enhance the credit union’s ability to provide consistent, fast, and quality member services by fully linking all delivery channels, says Callis.

“There’s no question we’ve made big changes in the past couple of years that have yielded greatly improved efficiency,” she adds. “Now, when we commit to a service promise, we keep it. This is evident in our new 30-minute equity and consumer loan decisioning guarantee.”

Next: Positioning for growth

Positioning for growth

Since Arizona was hit hard by the recession, “We’re no strangers to having to cut costs.” says Daniel F. Desmond, president/CEO of $760 million asset TruWest Credit Union, Tempe, Ariz. “Like most of our peers, we’ve been operating under a regulatory requirement to reduce costs for the past couple of years.”

Because all the local financial institutions have been facing the same issues, he adds, it has been relatively easy to remain competitive in rates and services.

TruWest’s approach to cost-containment has included trimming its staff size. “Our staff represent nearly half of our total operating expenses, so it was clearly an area that could yield cost-cutting results,” he explains.

Since the start of the recession, the number of employees has decreased from 218 to 186. “We also suspended the 401(k) match and had to increase the employee cost-sharing percentage for health insurance,” says Desmond.

While these cost-cutting measures are noticeable, members might not have noticed the credit union’s revenue challenge. The credit union made significant cuts to marketing expenses and instead opted to use lower-cost email campaigns.

The board and management have scrutinized every component of the credit union’s products and services to keep the budget in balance and systematically make sure members’ needs are met.

Part of the process includes analyzing outside vendor costs. “We’ve had good success by analyzing complex third-party billing for items like telecommunications, credit and debit card, and ATM processing,” notes Desmond. “We’ve also negotiated on all contract renewals and branch lease renewals.”

To stay competitive without cutting services, TruWest balances budget issues with member needs by putting more focus on electronic delivery of services.

“The compression of net interest margin is one of the biggest challenges we face,” says Desmond. “As higher-yielding loans and investments pay off, mature, and are replaced with loans and investments with lower yields, we’re facing a significant squeeze.”

The loss of debit interchange income also has put a dent in revenue. “We estimate a decrease of $110,000 in debit interchange income in 2012 from the 2011 level,” says Desmond.

The biggest expense challenge continues to come from provision for loan losses, he says. “Still, we’ve made every effort to preserve and build net worth, to position our credit union to take advantage of growth opportunities when the recession is over.”

Gaining staff buy-in

Competition is the primary force driving $265 million asset E Federal Credit Union to be more efficient, says Tyler D. Grodi, president/CEO. “We’re looking to cut costs on items that are unnecessary, inefficient, or unrelated to our strategic plans,” he says, adding that the goal for 2012 is to position the Baton Rouge, La., credit union for growth when the economy rebounds.

It’s one thing to talk about cost-cutting measures, and it’s another to strategically implement them so staff are on board, he says. “We’ve found the most important obstacle to overcome, if we want to reduce expenses, is to gain employee support. We’ve challenged staff to submit cost-saving and efficiency-improvement ideas which align with E Federal’s strategic goals.”

Employees are challenged each month to submit the ideas, he adds. “We call it iMOJO or ‘ideas meeting objectives, joined as one.’”

Staff are an important part of the solution, so it’s important that they contribute their ideas, he notes. “In one month since iMOJO was introduced, the staff submitted ideas related to payroll processing and the quarterly newsletter that will save the credit union $10,000 next year.”

The credit union also created a Member Satisfaction Action Team to find ways to maintain high levels of member satisfaction, reduce expenses, and increase the credit union’s efficiency.

What does expense reduction have to do with member satisfaction? “Service excellence affects member satis

faction, but so does improving net income,” says Grodi. “Higher earnings translate to higher dividends and lower loan rates which ultimately improve member satisfaction.”

E Federal also is reviewing its entire business model—products, services, markets, third-party vendors, branches, and back office operations—to discern the best opportunities to reduce expenses.

“These reviews help us identify fixed expenses and variable expenses,” he says. “We then compare and benchmark these against our peer group averages. That gives management ideas about ways to cut costs and where we need to focus attention going forward.”