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MADISON, Wis. – Given that it touches about 95% of credit unions in one way or the other and it’s embroiled in a labor dispute that has turned out to be all about money, CUNA Mutual’s year-end ’04 results are certainly worth exploring. The company has said throughout its labor battles that it needs to make changes that will ensure its financial stability going forward so it can stay competitive and still innovate for its credit union clients. 2004 was solid on many fronts – including record profits – but the company still feels it is not growing revenue fast enough and is falling short in some key financial benchmarks, such as return on equity. Revenue was $2.48 billion. Operating revenue grew just 5.5%, below 2003 revenue growth of 6.8%, and below its 2004 goal of 10%. CUNA Mutual netted $136 million in profits. This number is driven by its operating gain of $122 million, just shy of its goal of $125 million. (That goal is set each December by the board of directors after an extensive evaluation of its business lines.) Company ROE dropped slightly from 9.7% in 2003 to 9.5% in 2004. CUNA Mutual CEO Jeff Post has made it clear he wants to see ROE of at least 10% and closer to 12%. CUNA Mutual CFO Jeff Holley says the company has something it calls it’s “10-plus” goals. It wants revenue growth in double digits and ROE above 10%- both of which weren’t achieved. Holley said if the company is not on track for double-digit growth it needs to make changes. Holley isn’t talking about slashing jobs and cutting expenses to the bone, in fact he’s pleased with the company’s $990 million of operating expenses in ’04. “Expense levels are good, we need higher revenue growth. We need to understand what credit unions want from us, what products and services we can do better than anyone else.” Credit unions consistently tout how they return profits to members and as cooperatives don’t need fat bottomlines to impress shareholders, so does CUNA Mutual, a mutual that plays in a cooperative market, really need double-digit ROE growth? Holley says absolutely if the company wants to continue to grow and stay competitive. “Competition is as heated as I’ve ever seen it. There is not really one organization we face off with day in and day out, it really depends on the product line,” said Holley. For example on the bond front Allied Solutions has entered the fray and taken away some clients. It’s also seeing vigorous bond competition from The Lockton Agencies in Texas, which moved U.S. Central, as one example, away from CUNA Mutual. On the member side, where many of CUNA Mutual’s products fall these days, it faces homegrown CU industry competitors like CUSO Financial Services, as well as major Wall St. firms such as Fidelity, which competes for 401k and defined benefits. Post has said he has spoken to CEOs of CUs that have left the CUNA Mutual bond and price was the driving factor. CUNA Mutual still isn’t looking for the lofty performance numbers that public insurance companies see, said Holley. “Public companies are aiming at 15 to 20%, pretty high numbers. As a mutual insurance company serving a cooperative marketplace, our goal is less than that. Not because we don’t want over 10% ROE, but we reinvest back to credit unions in new products and solutions. Our philosophy is not of a public company, but of a mutual.” Holley said each year CUNA Mutual calculates what it “gives back” to the industry, which in reality is mostly an indicator of its own business, not what it’s “giving” to the industry. That number went up from $1.1 billion in ’03 to $1.2 billion in ’04. That’s broken up as the following: * $200 million in fee income for CUs, * $385 million of life, auto and homeowners claims paid, * $450 million of credit insurance payments, * 160 million of claims paid to CUs (fidelity, property losses, etc.) “We add that all up and it’s an indicator we’re making progress. We’re serving more and more credit unions with more and more coverages.” Taking one final look at the company’s 9.5% ROE, and it’s worth nothing that it is up dramatically from the 4-5% level the company experienced in 2001 and 2002. Part of the reason is its staff is down 8.5% over the last two and a half years, dropping from 5,100 (domestic only) to 4,700. It has another 1,000 international employees. Another factor is investment income of its own dollars is also up. Holley said the company’s investments scored in the first percentile, which is the top of its goals. In 2001-2002, its investments did not perform as well. Areas of Weakness One area CUNA Mutual clearly fell short last year was lending solutions. This is troubling in that it could be one of the company’s biggest growth areas. Its Lender Development Program is designed to try and get more credit unions members to buy credit protection when they take out a loan. It’s during the lending event where credit unions can offer CUNA Mutual’s credit life/disability, debt cancellation, mechanical repair and GAP coverage. Holley said only about 15% of loans are getting this protection with a CUNA Mutual product. “We’re looking to grow that participation by about 30 points,” said Holley. What’s hurting CUNA Mutual is more and more credit unions are doing indirect lending, and loans closed at the dealership are not as likely to be penetrated with CUNA Mutual credit insurance products. How do you combat that? One way is to partner with the industry’s largest indirect company, CUDL, which CUNA Mutual has done. The bright spot on the credit protection side was debt cancellation. A relatively new product, it pulled in about $3 million in revenue for the company last year, a small number but it’s up from almost nothing and is likely to grow in ’05 said Holley. Interestingly, he noted that debt cancellation seems much more popular on the West Coast than other regions of the country. First mortgages issued by CUs through CUNA Mutual Mortgage were also down dramatically from 30,000 in ’03 to 10,000 in ’04 but this was mainly market driven as refis dried up. Credit unions historically do much better with refis than originating first mortgages said Holley. Still CUNA Mutual ended the year with a $10 billion servicing portfolio, only down slightly from ’03. One of CUNA Mutual’s weaknesses may be what today looks like a strength. It’s 500 MEMBERS Financial Services reps helped bring in $20 million last year. MFS is the old Plan America. It’s been a complete turnaround story, from losing money during the Plan America years to a $20 million revenue producer in ’04. The problem is it may be understaffed – 500 reps may not be enough to cover the entire country. Holley agreed saying the company hopes to staff up by 50 to 60 this year and in turn bring in more revenue. MFS reps are placed in CUs and offer securities, insurance and other products. Credit union mergers also hurt the company. Holley said when two CUs merge, that turns to fidelity bond policies into one, two D&O policies into one, and on and on. The price of those policies will go up because of the increased assets, but Holley said it’s not enough to make up for the two-to-one drop in policies. One area CUNA Mutual is making solid progress is executive benefits, which surprisingly is a product line that’s only about five years old. This is where executive 457s and other plans would fall. The company had $168 million in executive benefit deposits in 2004 and 330 new sales. “That’s been growing about 15 to 20% a year,” said Holley. CUNA Mutual’s union, the Office of Professional Employees International Union Local 39, has its own take on the company’s financials. “CUNA Mutual is doing well. They had record profits. They have said throughout negotiations they have to have all these changes to make CUNA Mutual survive. To me it’s easy to say, but it’s not true. The employees have now gone three years without a pay increase, and the company hasn’t had to give up anything,” said OPEIU Local 39 Business Manager John Peterson, who believes the company’s ROE goals are getting too high. “Kitchen’s goal was 10, they obviously think they need more now. They put out these high goals all the time, I don’t think they really expect to meet them,” said Peterson. Peterson said if the company wants to save money it should look at its management ranks. “One of our employee stewards figured out that they have 900 managers who have 1,400 employees under them in some way. That’s not a very efficient ratio.” Holley said he feels CUNA Mutual laid a lot of groundwork in 2004 that will pay off in real dollars in ’05. “Things are looking up. We had a good year in 2003 and in 2004 there was continuing momentum. In ’05 we have a new CEO and we will continue to build on strengths we already have.” [email protected]

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