By Ray Birch
CHICAGO—Credit unions have returned more than $175-million to members in the form of 2018 year-end bonuses and rebates, but CUs themselves were refunded $735-million from the NCUSIF by NCUA during the year. What has happened with the other $575 million?
Sources interviewed by CUToday.info indicated funds are primarily being reinvested in various ways, especially solutions and programs aimed at driving greater loyalty, such as reducing costs to members. Other CUs have applied their refunds to bolster their capital positions. While at least one person said the money is needed to protect against “wolves at the door,” one CU has used the refund to create a charitable endowment.
Adding Member Value
Steve Williams, president of Cornerstone Advisors, said there are multiple ways he sees credit unions using the money to add member value.
“Some of the benefits come in the form of price—well-priced products all year long,” Williams said. “Also, cutting out or reducing fees.”
Williams also believes many credit unions are improving the member experience through new and more sophisticated branches and digital banking systems.
“Yes, some are doing a direct, year-end giveback. I am not a fan of saying the rebate should be earmarked for year-end giveback,” said Williams, who added the data also show a hefty chunk of the money has gone to capital.
An argument could be made that credit unions have plenty of capital already, said Williams.
“What I am seeing is it’s not a simple decision to just give the money back to members, because there are other things credit unions are looking to use their capital for,” said Williams.
Some of that capital is being held in reserve for what many are predicting are tougher times ahead, Williams suggested.
“We are going into a rougher economic environment, one in which I believe return on assets for credit unions will drop slightly due to funding costs and the potential for a recession,” explained Williams. “Therefore, it’s natural for boards to be thinking about this as we head into an economic slowdown after 10 years of expansion.”
Cost of Funds Pressures
Another reason CUs might be holding onto the refund for a rainy day is expectations of new pressures on cost of funds as deposit rates rise.
“This issue will be very real,” said Williams. “Credit unions are trying to manage earnings pressure at the same time they have to invest in things like mobile banking, new marketing approaches, analytics… There is a transformation budget that’s fairly significant that can’t be ignored.”
Williams said many CUs are facing a critical period of change in which they simply can no longer be “your dad’s old credit union. They have to use the rebate money for a longer-term member value strategy over a giveback program.”
Williams’ sentiment is similar to what many credit union CEOs told CUToday.info last year when asked how they would use the funds, as reported here. While some CUs indicated they planned to return the refunded money right back to members, most were thinking about longer-term needs, such as upgrading data systems and mobile banking platforms, to remain relevant with members as their service expectations rise.
‘Wolves at the Door’
Jay Johnson, partner at Callahan & Associates in Washington, said his sense is credit unions are using the funds “broadly to invest in member value—continued investments in technology, rate specials, those sorts of initiatives; but not really in any programs specific to that rebate.”
Michael Moebs, economist and CEO at Moebs $ervices in Lake Forest, Ill., believes many credit unions are hanging onto their rebates to fend off “wolves at the door.”
“Are there wolves lurking? Yes, and some are known as capital, expenses and fees. The basic position is to have a minimum of 10% capital to assets. This is the first use of the rebate. Protect the CU’s house from being blown in by the Big Bad Wolf,” said Moebs, pointing to NCUA as potentially the biggest wolf in the pack.
“In 2018, the CU movement netted more than 10,000 new employees. Banks and thrifts netted in total a reduction of more than 5,000 employees,” explained Moebs. “Non-interest expenses to assets for banks, thrifts and fintech firms for 2018 was 2.50%, while credit unions were 3.05%. Cross-sale numbers including loans and all deposits is 2.5 for banks vs. 1.1 for credit unions. Technology is increasing worker productivity in financial services, so less bodies is less expense.”
Moebs suggested CUs use the rebate to put in place an attractive severance package to reduce their number of employees.
“Simultaneously, compensate with special incentives the remaining employees who increase productivity by cross-selling more and reduce non-interest expense,” he said.
He also believes CUs need to use rebates to afford reducing fee prices.
“Overdraft prices are now the same for banks and credit unions at $30 per transaction. Lower fee prices, OD’s to $19.99 or less. Use the rebate to shore up the loss in revenue for a few months until more volume kicks in,” he said. “Lower overdraft price equals more volume, more volume equals higher revenue, and in the end the members win. The fable of the Big Bad Wolf teaches credit unions to use the rebate wisely for long-term, strategy benefits: a stronger credit union, more productive employees who are paid well, and lower prices for members.”
Creating An Endowment
But some credit unions have returned every dime. In South Burlington, Vt., Bob Morgan, CEO of the $590-million NorthCountry FCU, said his shop did not hold back any of the rebate.
“We distributed the rebate, and a little more,” said Morgan. “We gave back an extra $130,000 in community donations beyond budget. We also reduced our NSF fee from $25 to $15 from the week before Thanksgiving through the end of the year. This caused us not to collect $224,000 in fee income we otherwise would have received, which we believed was an impactful giveback to members. Combining these two things, we actually gave back over $37,000 more than we received from NCUA.”
In Minot, N.D., $440-million Town & County CU used its $200,000 refund for charitable purposes, as well.
“We used it to fund a charitable donation account, the first of what we hope is many contributions to it until we get it to an endowment-type level that ensures we always have funds dedicated to our communities,” said CEO Jeremiah Kossen. “Our intent is to use all earnings from this for the community, not just the 51% requirement.”
As CUToday.info reported, NCUA recently approved a $160.1 million equity distribution from the NCUSIF to be paid out in the second quarter of 2019.