We’re getting more questions lately regarding how all of these market fluctuations affect our credit union. Actually, the answer is: quite a bit. Most credit unions have between 50 to 70% of their share deposits out in loans to their members. We are no different in that regard. After accounting for statutory reserves and operational needs, we still have excess liquidity that we need to put to work. Unfortunately, like our members, we are limited in what we can invest in and the investment yields are at historic lows. Recently, the Federal Reserve announced that they will probably not raise rates until mid-2013. That, along with other foreboding national news, sent the treasury and bond markets into a dive. I’m sure that many of you have watched the ups and downs of the stock market as well.
In these kinds of conditions, there is usually a flight to safety. Translation, depositors run to credit unions and banks to park their hard earned money in federally insured accounts. The over-supply of deposits, coupled with the low investment yield in the treasury and bond markets, forces deposit rates down.
There is one other contributory element - loan demand. For almost two years now, consumers have all but stopped borrowing. Call it consumer fatigue or fear of new debt, loan activity is extremely low. In this environment, if you’re in the borrowing market, life is good. Loan rates are at historical lows and it doesn’t look as if they will go up anytime soon. In the credit union’s case, if we have low loan demand, we have no trigger mechanism to raise your deposit rates. We have to have sufficient loan yield to pay market level (or higher) deposit rates. So, if you’re wondering why we are asking our employees to ask you if we can refinance your “other” loans, it’s because we need more loans to keep everything else in balance. If we don’t get the loans, it directly affects our pricing of deposit rates.
Other than loans and investments, we monitor very closely the various fee schedules. Fees are a necessary part of our financial balance. Historically speaking, our fees to our members have been significantly lower than our peer credit unions. For instance, as of July 31, 2011 our fee income ratio is 0.38% compared to our peer at 0.88%. And that is just compared to other credit unions. If we compare to banks, well, it’s the Grand Canyon in comparison. Regardless, we work very hard to make sense of every fee in an effort to offset expenses and, in reference to our shrinking loan portfolio, to augment loan and investment yield shortfalls.
I’ll use one example that is going into effect soon – the $2 paper statement fee for account holders younger than age 65. Approximately 20% of our members are age 65 and older. We were concerned that this demographic might not totally adapt to e-statements and so your board of directors carved them out from this fee. Our statement processing, printing and mailing expenses are increasing. We introduced e-statements several years ago, but very few members have taken advantage of it. After looking closely at our demographics, we determined that the best way to reduce this increasing expense (and encourage our members to use e-statements) was to assess a fee for continued paper usage. Just since the announcement, hundreds of members have opted in to e-statements. Whether we get the fee revenue or not, every time we eliminate a paper statement, we reduce the costs associated with paper statements. I would rather eliminate the increasing expense of paper statements than collect fees. Please take a hard look at our e-statement product and opt in to avoid the fee. It is safe and user friendly. To opt in to e-statements, you must enroll in Home Banking. Any one of our Member Service Representatives can get you started.
I hope this explanation has helped you understand a little more about the inner workings of our credit union in relation to the wild and crazy events of our time. As always, we continue to strive for improvement of our products and services to benefit our members and we do so with great care, knowing that in the end, it has to be a value-added proposition for you.
Brian J. Barkdull
President and CEO