NAFCU Journal September October 2021

36 THE NAFCU JOURNAL September–October 2021 REVENUE DIVERSIFICATION THROUGH STRATEGIC INVESTMENTS By Sara Dolan C redit unions are dedicated to serv- ing their members and offering a wide variety of products and ser- vices. The core of these offerings are rate sensitive loan and deposit products. As the rate environment over the past several months has contributed to margin compression and excess liquid- ity, now is the perfect time to evaluate opportunities to enhance product offer- ings and improve earnings by investing in strategies to diversify revenue streams. 1. Put Excess Funds to Work Credit union liquidity strategies typically emphasize using share growth to meet members’ demand for loans and other transactions. The increase in liquidity on credit union balance sheets over the past 18 months provides opportunities to use these excess funds to generate earnings, improve efficiency and increase capital while maintaining core liquidity. If your investment portfolio is adequately funded to accommodate forecasted cash flow needs, it’s a great time to evaluate other uses for excess funds—especially as traditional investments are generat- ing extremely low yields. These include opportunities to invest in “normally imper- missible” investments such as Business Owned Life Insurance (BOLI) or Chari- table Donation Accounts under NCUA Rules 701.19 and 721.13 to offset employee benefit expenses and charitable donation expenses, respectively. Other options such as the Trust for Credit Unions mutual funds and Curql Fund, a fintech venture capital fund, can add value to the invest- ment portfolio. 2. Evaluate Partnerships to Complement Organic Loan Growth Member loan demand can be volatile due to demographics, economic conditions and competition. Many credit unions have established relationships to originate auto loans through dealerships, sell mortgage loans or participate in business loans. A diversified network of lending partners can benefit other segments of the loan portfolio. Establishing additional relation- ships with brokers or fintech partners to increase loan origination volume through participations, purchases or funding relationships can help to stabilize growth over various economic cycles. These rela- tionships can also be used to sell excess loan when demand is strong. This helps to optimize the loan portfolio composition and manage concentration risk, interest rate risk and net interest margin. 3. Consider CUSOs Credit Union Service Organizations (CUSOs) can provide opportunities to diversify revenue and improve efficiencies. Credit unions can partner with CUSOs to aggregate operational costs or deliver com- plementary products such as insurance or investment services. These strategies are commonly used across the industry. Credit unions can also evaluate strategies to invest in CUSOs that support products and services targeted to the financial services industry and, specifically, credit unions. This year, we established a holding company to invest in and create CUSOs. As we are not able to effectively create all the necessary products and services members are seeking, partnering with other CUSOs to deliver these products is an effective strategy to increase products and services to members and remain com- petitive. These investments can provide opportunities to be a minority investor with a board seat or to be a majority or 100% owner. This provides the credit union the ability to have a voice in the strategic roadmaps for the products and services for the industry. Revenue diversification not only con- tributes to greater stability in earnings and to mitigating volatility in net interest income, it can enhance your relationships with your members. Exploring a variety of options to generate diversified revenue streams can also expand products, ser- vices and channels available to members. This contributes to increased member engagement and sustainable growth as the credit union becomes a trusted source for financial advice. Sara Dolan is chief financial officer for Michigan State University Federal Credit Union in East Lansing, MI. MANAGEMENT INSIGHT