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Jan 21 2016

The Financial Institution of Your Dreams

Article

Written by webmaster

4 min read

By Cynthia Walker, CEO and Jeffrey Johnson

The January 2016 Consumer Report magazine front cover reads, “Get the Bank of Your Dreams.” The focus of their main article ties in very closely with the topic I want to address. When people I meet find out I work with credit unions, they often ask, “Why should I join a credit union instead of a bank?” Many of us in the industry give an answer about the benefits of being a member vs. a depositor and the credit union philosophy of “People Helping People.” While I believe these reasons are solid and go a long way towards retention, they usually do not seem to resonate enough with a person to compel them to make a change. When I tell them that credit unions usually have higher deposit rates and lower loan rates, their interest spikes. There are many reasons why a credit union might be the best choice for financial services. While some of the reasons may be ambiguous and hard to measure, others are clear and distinct.

Because of acquisitions and mergers, today there are 4 mega banks that hold a large share of the market. That being said, there are still many alternatives for financial services. Consumer Reports found many smaller banks and credit unions that provide compelling alternatives for customers dissatisfied by or uninterested in big banks, and there are quite a few more options than people may realize.

Credit union members were among the most highly satisfied overall and ranked at the top for in-person customer service and lower costs while the big four banks landed near the bottom of the Consumer Reports rankings. According to Moeb Services, a research services firm in Lake Forest, IL, about 80 percent of credit unions offer free checking vs. only about half of conventional banks. Fees still creep in but on average, credit union members pay annually only $71 per year for checking while bank customers pay $183, according to a study of all transactions and fees in more than 16,000 bank and credit union accounts by Victor Stango and Jonathan Zinman, professors at the University of California, Davis, and Dartmouth College, respectively. In addition, we know that big banks seek out and cater to well-to-do customers while credit union products and services better serve the average consumer, and they customize their services to meet the needs of their unique fields of membership, and have the ability to better reach underserved communities.

As mentioned above, credit union members also benefit from slightly higher interest rates on certificates of deposit and significantly lower rates for credit card, unsecured, and auto loans. In 2015 credit unions outpaced commercial banks across all consumer lending and asset quality categories, according to research conducted by Callahan & Associates on the quarterly data released by NCUA and the FDIC. Credit union loan portfolios rose by 10.7% annually compared with 6.6% for commercial banks. Jon Jeffreys, managing partner at Callahan & Associates, is quoted as saying, “Credit unions continue to provide American consumers outstanding value in an increasingly competitive landscape for financial services, and it shows, as the not-for-profit cooperative model continues to produce outstanding growth metrics across the board.”

At Mark H. Smith, Inc., we have always enjoyed working in the credit union industry and our association with honest, hardworking, and friendly people. While big banks are best known for convenience and technology, credit unions can grow their business by focusing on the areas where they are exceptional, which are in-person customer service and lower costs.

Below are some graphs comparing rates between credit union and banks for 7 products. This data was pulled from historical rate information compiled using SNL Financial going back to 2007. These graphs clearly depict some of the measurable and financial advantages of choosing a credit union.

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Jan 14 2021

Five Top Credit Union Topics For 2021

As we move into 2021, the following topics might be worth discussing and considering with your management team.

Earnings

During the first half of 2020, net interest margins came under substantial pressure as market interest rates were shocked dramatically downward. Net interest margins are expected to remain under downward pressure throughout 2021 as investment portfolios continue to reprice lower and share growth continues.

One of the easiest and quickest responses to declining interest income is to address the cost of funds. Many credit unions still have room to decrease their cost of funds, as shown in the September 2020 ending period graph below.

Source: NCUA

Delinquency

Based on the September 2020 call report data, loan delinquencies and net charge-offs remained low and were below September 2019 delinquencies. Loan forbearance and other assistance programs in place through the entirety of 2020 may have helped delinquencies. Also, certain sectors of the economy are not as impacted as others. The unemployment rate is expected to continue drifting lower in 2021. However, as the assistance programs are lifted, delinquencies and charge-offs are expected to increase as unemployment remains substantially above the years leading up to the pandemic.

Source: MHSI Online Peer Analysis Module through September 2020

Credit Union Philosophy

Serving the underserved has always been a hallmark of credit unions, and now more than ever, there is an opportunity to do this for many credit union members. As these times have been challenging, credit unions can continue to evaluate and prioritize how to best serve members in the coming year, especially those under financial stress. Exploring how to provide service to those that are underbanked might be an opportunity. One option may include evaluating risk-based lending policies and programs, especially given the robust liquidity on most credit union balance sheets. New and alternative avenues to bolster income should continue to be explored.

Digital and Technology

As the pandemic shifts and prolongs, credit unions should evaluate if their electronic delivery channels meet members and potential members’ needs. Moving to or improving digital delivery channels should be accelerated and prioritized. Digital delivery should include evaluating loan origination and servicing channels to maximize new loan volumes. Online and remote financial services will continue to grow and may be the preferred way members access and manage their financial activities.

Balance Sheet Growth

Before the pandemic, many experts anticipated credit union loan growth to taper off but remain positive. After the first quarter of 2021, loan production became unpredictable, however, by the end of the third quarter, annualized loan growth was 6.34%. Real estate lending, driven by the abruptly lower interest rate environment, helped with the growth. Experts anticipate loan growth to be around 6.0% to 6.5% over the next 12 months as the economy recovers.

The first few months of 2021 may see strong share growth as the second round of government assistance and stimulus takes hold, and households remain reluctant to spend until signs of COVID easing and warmer weather occur. Share growth last year increased at an annualized rate of over 18% and is expected to be approximately 8.0% to 10.0% in the coming year. If double-digit growth continues, earnings sufficient enough to sustain capital will be critical. If economic conditions improve and overall consumer activity increases, loan growth and increasing long-term interest rates could counter some of the anticipated income pressures. Fortunately, the credit union industry is very well capitalized and able to ride out the adverse conditions and absorb some more growth, even if earnings are reduced.

Nov 04 2020

The Bottom of the Frog Market

Several years back, I went to Mexico for a vacation. While there, I found a ceramic hand-painted frog-shaped planter that I wanted. My husband loves the hunt, and his quest began. Every time we saw a frog-planter, he would start negotiating with the vendor to get the lowest possible price. We searched for several days and would stop in different towns and check the markets while enjoying our vacation and exploring. When we found a frog, he would inquire about the price and negotiate for further discounts. After a few days and no success at getting the cost of the frog below a certain point, my husband declared, “we have hit the bottom of the frog market.”

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The Bottom of the Frog MarketRead More »

Sep 30 2020

Economic Uncertainties and Interest Rate Certainties – Asset Allocation Assessments and Considerations

Future GDP Projections

In September, the Federal Reserve Chairman spoke publicly on several occasions and reiterated that the central bank is committed to helping the economy “for as long as it takes.” He noted continued improvements in the economy, but also acknowledged a highly uncertain path ahead. The September FOMC (Federal Open Market Committee) projections are now projecting a full-year GDP decline of 3.7%. This is substantially better than their previous expectation of a 6.5% decline. However, they lowered their 2021 outlook from 5.0% to 4.0% and their 2022 outlook from 3.5% to 3.0%. Their 2023 outlook is at 2.50%.

Interest Rates and Economic Uncertainties

The FOMC also indicated that they would allow inflation to run above 2.0% on a sustained basis before any federal funds rate increases. As such, most individual members of the Committee indicated that the federal funds rate could remain close to zero through 2023. Some economists and analysts even think that we may not see an increase in the federal funds rate until 2024 or 2025. They believe that it will take up to five years for the global economy to fully recover to pre-pandemic levels.

The risks to the FOMC economic growth projections are high. Even the Chairman of the FOMC acknowledged the economic uncertainty of the path ahead. Following the sharp rebound in many economic data measures and drop in the unemployment rate, some recent measures have disappointed compared to expectations and some are indicating a recovery that is stalling. At the current time of this article, the nature of further fiscal stimulus continues to be negotiated in congress and some are not expecting a resolution until after the presidential election. Of course this only adds to the current economic uncertainty.

What is highly certain over the short to medium term timeframe is that interest rates will not likely be increasing more than just relatively minor fluctuations in the medium to long end of the U.S. Treasury yield curve. It is more likely that potential risks on the horizon could drive medium and longer-term U.S. Treasury yields even lower.

Reassessing Balance Sheet Strategy

Given the above outlook, it would certainly seem that some credit union balance sheet strategies of recent years should be reevaluated for the foreseeable future. Reassessing asset allocation strategies is possibly more relevant at the current time than at any time in the past several years. For example, the credit union may want to ask itself how much should we be redeploying assets into two to three year investment CDs given current interest rates on those maturities. If the answer is less than previous years, then what are the alternatives we can explore.

Priorities Going Forward

In exploring alternatives, the first priority for credit unions is of course serving members. Assessments and considerations could include expanding the types of loans offered, reevaluating risk based lending allocations, increasing real estate concentrations, debt consolidation programs, and loan payment support alternatives to name just a few. Secondary to the first priority are considerations such as allocations to loan participations and alternative investments. For example, should the credit union assess CUSO or similar investment possibilities. What are all of the possibilities for these type of investments that may be available to the credit union? After all, an alternative of earning five basis points at the corporate credit union with too much of assets is not likely to accomplish any priorities or goals for the credit union.

The present time and foreseeable future is a great time for credit unions to really show how they can serve and support members during these challenging times. Being there for your members is for sure the highest purpose for the credit union and always assessing ways to provide service and assistance to them will always be the credit union’s first priority. In addition and secondarily, now more than any time in recent years it may make sense to really take a deep dive into the above asset allocation assessments, considerations, and possibilities. Ideally, the best answers going forward would combine the first priority with the second to optimize balance sheet performance while best serving members.