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Bridge to the Future MCUL 2007 Executive Summit

Bridge to the Future MCUL 2007 Executive Summit

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Bridge to the Future MCUL 2007 Executive Summit

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  1. Bridge to the FutureMCUL 2007 Executive Summit Leadership Issues Dialog Presented by David Adams, Michigan Credit Union League and Peter Gates, Michigan Schools & Government Credit Union Sponsored by

  2. Key Issues Facing Credit Unions • Membership Growth • Older Membership • Loan Growth • Innovation • New IT Architectures • Earnings • Payment Systems • Security • Business Lending • Legislation/Regulation

  3. Membership Growth

  4. 1) Membership Growth • Since 2000, U.S. annual membership growth has averaged 1.9% and is expected to remain at that level barely keeping up with the U.S. population growth • Switching to community charters has added millions of eligible members, in fact 54% of the roughly 78 million nonmembers say they are eligible to join but have not • The key to attracting potential members in their peak borrowing years is attracting Gen Y—consumers age 18 to 30. Gen Y is one of the largest demographic groups in the U.S. with 45 million people, or 15% of the population

  5. 1) Membership Growth CU Membership & U.S. Population Growth Annual growth rate Year Source: NCUA and CUNA

  6. 1) Membership Growth Number of Potential Members in U.S. By Age(millions) Source: CUNA’s 2006-2007 Survey of Potential Members

  7. Eligible nonmembers who use banks Members who use only CUs All CU members 1) Membership Growth Loyalty Levels Sources: CUNA’s 2006-2007 Survey of Potential Members

  8. 1) Membership Growth • 7% or 28 CUs exceeded 10%, average assets $121,402,857 • 6% or 24 CUs between 5%-9.99%, avg. assets $83,069,593 • 27% or 101 CUs between 0%-4.99%, avg. assets $114,685,480 • 60% or 223 CUs had negative growth, avg. assets $65,739,148 • Lower growth generally in smaller asset CUs but the differences aren’t dramatic. Some large asset CUs also have small membership growth 2006 Michigan Membership Growth Source: Callahan’s Peer-to-Peer

  9. 1) Membership Growth MI Success Story First Area Credit Union – 12.21% Growth • Exceptional member service • Addressing members by first name • Sending birthday cards to members • Monitoring papers for special occasions such as retirements and sending cards • Opened branch in area with little competition

  10. Older Membership

  11. 2) Older Membership • The average age of members continues to rise and is now 47 compared to 43.3 just 12 years ago • Credit unions are in the midst of a major decline in peak borrowers – members age 25 to 44 • The percentage of membership in this group has declined from 48% in 1996 to 38% in 2006 • This demographic shift has worked against credit unions for about 7 years and will continue at least through 2010

  12. 2) Older Membership Percent of CU Members Age 25-44 (estimate) Sources: CUNA National Member Survey Reports and CUNA Member Statistics.

  13. 2) Older Membership Mindset of 18–24 Year Olds • There have always been ATM machines • Social Security system has always been on the brink of collapse • Have never experienced a real recession • They have always had access to e-mail • Electronic filing of federal income taxes has always been an option • Computers have always fit in their backpacks • “Ctrl+Alt+Del” is as basic as “ABC” Source: 2003 – 2007 Beloit College Mindset List

  14. 2) Older Membership Age Distribution of Members and Eligible Nonmembers Source: CUNA’s 2006-2007 Survey of Potential Members

  15. 2) Older Membership CU Membership Status & Awareness of CUs Source: CUNA

  16. 2) Older Membership Michigan Develops Young Credit Union Members • During the 2005-2006 school year, Michigan credit union staff led the nation educating more than 45,000 students with more than 2,300 presentations on personal finance and in the operation of student run credit union branches • MCUL Family Involvement Council created the “Credit Union School Branch Handbook,” a nationally used step by step guide to starting a student run branch • Nearly 30 credit unions pledged financial support of Experiencia’s Exchange City in Taylor, designed to teach 5th grade students about personal finance, business fundamentals and entrepreneurship. According to students, the best job in Exchange City is the manager of Exchange City Credit Union

  17. 2) Older Membership MI Success Story CP Federal attracting younger members • Leads the nation in the number of student run credit union branches with over 40 in Jackson area schools • CP staff regularly conducts classroom presentations on financial literacy in conjunction with their school branches

  18. Loan Growth

  19. 3) Loan Growth • U.S. credit unions experienced double-digit loan growth in five of the past seven years • Loan growth in 2006 dropped to 8.7% and is expected to drop to 6% in 2007 • Rising interest rates, increased savings and weak pent-up demand are contributing factors

  20. 3) Loan Growth Annual percentage change (estimate) Sources: CUNA’s economics & statistics

  21. 3) Loan Growth • Three target markets identified for loan growth • Adults age 18 – 30 • Hispanics and Latinos • Small business owners • Financial products and services are commodities, and true differentiation will be driven by value innovation that enhances a member’s total experience with a lender. Value is created by moving beyond product silos, anticipating members’ life-stage and life-style needs, and bundling loan products accordingly.

  22. Black Asian Non-Hispanic White Hispanic Other 3) Loan Growth Credit Union Growth & Shifting Demographics 2000-2050 2050 2000 Source: U.S. Census Bureau

  23. --have special program in place --plan to begin process within next 12 months --unlikely to make special effort to serve this market --plan to begin process but not within next 12 mos. --in the pro- cess of starting a program 3) Loan Growth CU Plans to Serve Hispanics/Latinos Assets Sources: CUNA’s 2006 Hispanic Task Force survey

  24. 3) Loan Growth 2006 Michigan Credit Union Loan Growth • 17% or 64 CUs exceeded 10%, average assets $92.0M • 19% or 73 CUs between 5%-9.99%, avg. assets $98.3M • 24% or 92 CUs between 0%-4.99%, avg. assets $110.0M • 40% or 147 CUs had negative growth, avg. assets $57.3M • Lower growth generally in smaller asset CUs Source: Callahan’s Peer-to-Peer

  25. 3) Loan Growth CU Success Story Consumers Credit Union – 16.89% Loan Growth • Lending is an attitude and is developed with strong training and coaching • Lending driven organization from the top down • Believes a CU must grow members for loans and does not pay a premium on deposits unless it will be lent out • Loan portfolio in three categories (Business, Consumer and Mortgage) with an employee champion for each • Business lending is a must, direct or participation

  26. Innovation

  27. 4) Innovation • This is something many financial institutions talk about but few deliver. Yet innovation will be a key driver of value and differentiation in the new financial services economy as financial services become commodities • Using pricing as your primary strategic differentiator continues to become less effective as competitors make convenience and delivery channels more important • Differentiation among lenders will require value innovation that enhances a member's total financial services experience • Through insightful member relationship strategies, product bundling, and cross-selling initiatives, credit unions can nurture relationships that result in increased wallet share in the future"

  28. 4) Innovation The Filene Research Institute created i3 as a working group of diverse innovative, insightful and energetic credit union professionals • Identify and evaluate recent credit union innovations which • meet member needs/wants • lower costs and increase credit union operational efficiencies • build member loyalty • meet the special needs of member segments • enhance credit union effectiveness • Develop and implement new innovative ideas which address major issues, problems and opportunities facing credit unions • Identify and evaluate innovations in other organizations which could be adopted by credit unions • Provide a forum for cooperation, collaboration, professional development and industry succession planning

  29. 4) Innovation CU Success Story • Greater El Paso CU Savings Sweepstakes • Savings program allowing members to win prizes, the more they save, the more chances they have • Helps members build wealth • Educates members about savings and investing • GECU choose six families to compete against each other and mentored each family to help them save

  30. New IT Architectures

  31. 5) New IT Architectures • The top information technology (IT) initiatives for consumer lenders in 2007 and 2008 will be to transform core lending systems and IT architecture, and to develop tools to reach untapped markets • Credit unions are investing in technologies that will help them attract more members and get current members using more services • Attaining a competitive advantage requires a measured, balanced approach to risk vs. security measures • More than 50% of consumers would switch companies if their personal information were compromised

  32. 5) New IT Architectures • Data management is the backbone of your credit union and will require more integrated and sophisticated database and reporting systems • New IT architectures are emerging that will help give your members a consistent experience across all delivery channels and make it easier to develop strategies for attracting new members, and for cross-selling products and services to existing members • Service-Oriented Architecture (SOA) • Business Intelligence • Web 2.0

  33. 5) New IT Architectures Service-Oriented Architecture (SOA) • What it is… • A strategic design approach that ties your systems around specific business functions • Why it is important… • Targets information and functionality to a specific need (e.g. loan management), regardless of what systems provide them, to • Improve member responsiveness • Operational efficiencies • Savings by reducing errors • What it does… • Allows you to become less dependant on individual systems and standardizes and simplifies the screens users use

  34. 5) New IT Architectures Business Intelligence (BI) • What it is… • Applications and technologies which are used to gather, provide access to, and analyze data and information about your operations • Why it is important… • Helps management track key performance metrics and make better informed decisions • What it does… • Compiles data from across the organization in the form of dashboards, scorecards, reports, analytic applications and data mining Source:

  35. 5) New IT Architectures • Web 2.0 • What it is… • Second generation of the World Wide Web that is focused on the ability for people to collaborate and share information online • Why it is important… • New service delivery and communication channels for members, especially with younger demographics, and tools to facilitate staff collaboration and information sharing • What it does… • Uses new Web technologies such as blogs, social networking, wikis, podcasts, RSS feeds, Web APIs, Web standards and online Web services to facilitate information sharing in a very dynamic and interactive fashion Source:

  36. 5) New IT Architectures CU Village Services • Customer programming services • Database development and integration • Application development • Web interface and reporting • XML programming • CU Campus • New destination for credit unions to collaborate, share and learn • Podcasting • Social Networking • Multimedia and custom development services

  37. Earnings

  38. 6) Earnings • U.S. credit union ROA has fallen steadily over the past four years from 1.06% in 2002 to 0.83% in 2006 • Credit union return on assets is projected to fall to 0.65% in 2007 - 2008 • A weak economy, high debt levels, and slower home-price appreciation will produce overall savings growth of around 7% at credit unions in 2007 and 2008 • Credit union will continue to seek “member friendly” non-interest income

  39. 6) Earnings Economic Forecast 5-Yr Avg 2006 2007 2008 Economic growth 2.9% 3.3% 2.0% 2.5% Inflation (% change in CPI) 2.7 2.5 2.0 2.0 Core inflation 2.0 2.6 2.2 2.0 Unemployment rate average 5.4 4.6 4.8 5.4 Fed funds rate average 2.46 4.99 5.05 4.5 10-yr Treasury bond average 4.40% 4.79% 4.66% 4.8% Credit Union Outlook 5-Yr Avg 2006 2007 2008 Savings growth 6.6% 4.2% 7.0% 7.0% Loan growth 9.7 7.8 6.0 6.0 Asset growth 7.4 4.6 6.9 6.9 Membership growth 1.9 1.4 2.0 2.0 Loan-to-share ratio 75.8 82.3 81.8 81.0 Delinquency rate ($, 60+ days) 0.74 0.68 0.75 0.80 Net charge-off rate 0.52 0.47 0.59 0.60 Return on average assets (ROA) 0.93 0.83 0.65 0.65 Net worth ratio 11% 11.5% 11.4% 11.3% Source: CUNA economics & statistics, April 2007

  40. 6) Earnings • 24% or 89 CUs exceeded 1.0%, average assets $81.7M • 35% or 136 CUs between 0.5%-0.99%, avg. assets $101.2M • 28% or 104 CUs between 0.0%-0.49%, avg. assets $86.2M • 13% or 47 CUs had negative growth, avg. assets $34.7M • Lower earnings generally in smaller asset CUs 2006 Michigan Credit Union ROA Source: Callahan’s Peer-to-Peer

  41. 6) Earnings • 8% or 31 CUs exceeded 10%, average assets $111.0M • 13% or 47 CUs between 5%-9.99%, avg. assets $148.4M • 24% or 92 CUs between 0%-4.99%, avg. assets $142.2M • 55% or 206 CUs had negative growth, avg. assets $39.4M • Lower growth generally in smaller asset CUs 2006 Michigan Credit Union Share Growth Source: Callahan’s Peer-to-Peer

  42. 6) Earnings CU Net Interest Margins and the Importance of Non-Interest Income Basis points of average assets Margins did not cover operating costs Source: CUNA

  43. 6) Earnings CU Success Story Forest Area Credit Union – ROA of 2.05% • Very strong lending philosophy that lending is the best way to be profitable • Maintain high loan/share ratio at 98.30% • Has high concentration of mortgages and utilizes secondary market to manage liquidity • Strong stable employee base with high morale • Strong Net Worth of 15.55 allowing fees and loan rates to remain low

  44. Payment Systems

  45. 7) Payment Systems • Revenue from payment systems was $224 billion in 2005 for financial institutions – more than any other line of business • The most significant trend over the past five years has been the rapid growth of electronic payments—debit cards, credit cards, and ACH transactions • Thousands of businesses are adopting remote deposit capture. As credit unions seek out new revenue sources, RDC can put them at the forefront of improved member service while increasing the credit unions bottom line

  46. 7) Payment Systems The Changing Payments Mix 2006 = $6.8 trillion 2000 = $5.5 trillion Sources: Industry Reports, BAC Finance, FiServ

  47. 7) Payment Systems Recurring Bill Payment Online Bill Payment 24% Use of paper checks is down from 72% in 2001 Electronic payments now comprise 45% of all recurring bill payments Source: Dove Consulting

  48. 7) Payment Systems In-Store Payments Sources: Dove Consulting’s 2006-2007 Study of Consumer Payment Preferences

  49. 7) Payment Systems • Remote Deposit Capture (RDC) enables credit unions to capture the wide variety of teller documents in a different processing environment, including truncation of items at the branch without further processing • It increases efficiency and facilitates a reduction in the number of courier runs • Saves both time and money • Eliminates the need for microfilm at branch locations due to the fact that the images are captured and retained at the remote location • Reduces float expense • Allows financial institutions to extend remote location hours/or cut-off times • Credit unions can provide same day credit to its members • Reduced fraud losses

  50. Security