|Looking Forward to 2013 May Require Looking Backward|
|Written by Brian Turner|
When addressing the latest economic outlook for 2013 and what it might mean for the nation's credit unions, there are three principle thoughts: 1) apparently it is true what they say about opinions – at least the part about everyone having one, 2) there appears to be plenty to blame for the current mess but very few specific remedies, and 3) refer back to number one.
Economic Growth and Member Spending
Behavior will Remain Modest
According to the latest forecast by the Federal Reserve and major market analysts, the nation's economic growth is projected to range between 2.2 and 2.4 percent next year. This is slightly better than the 2 percent pace anticipated for all of 2012. With consumer spending accounting for two-thirds of the nation's GDP, that puts spending expectations next year somewhere between 2.4 and 2.6 percent, slightly ahead of the 2 to 2.4 percent spending rates in 2012.
The employment sector continues to be the principle driver. Consumers continue to feel insecure about their jobs and worry about their household wealth profi le, as home values and stock market indices remain volatile. This hampers their desire to spend money, especially on big-ticket items such as automobiles, homes and appliances – all areas for which credit unions historically have extended credit.
This climate is less interest rate-sensitive to credit union members and more relevant to their personal cash fl ow profi les. It certainly has given members the opportunity to reduce their personal debt burdens as they pay off higher rate obligations. It has helped families live more within their means. However, there is what is commonly referred to as "burnout syndrome" in effect, as the average car on the street is now more than 12 years old and members are financially well beyond cabin fever.
Similar to the feeding frenzy that follows a fast, this sparks "flash markets" of euphoria as members hit the retail markets running – if only just to satisfy their immediate appetite. We've already seen evidence of this in 2012, as vehicle sales spiked from 13.5 million to 14.5 million annual units over a six-month period, only to see current forecasts drop back below 14 million for next year.
Modest Gains Should be Expected in Consumer and Mortgage Loans
Despite the latest reports on consumer confidence, which recently dropped for a fourth consecutive month, analysts do expect consumer spending to increase around 2.5 percent next year. This is slightly better than 2012, but remains below historical norms.
Flash markets experienced during the first half of 2012 resulted in credit union consumer loans increasing 4.6 percent, as a 2.2 percent decline in credit cards was offset by a 7.2 percent increase in vehicle loans. This is an improvement from 2011's one percent increase and 2010's 3.4 percent decline. Yet, according to Federal Reserve data, the industry's market share in non-revolving loans fell from 10.7 this time last year to today's 10.5 percent.
The mortgage market continues to be driven by refinancing applications, accounting for 85 percent of total mortgage applications. The industry's first-lien mortgage loans increased 6.8 percent during the first half of the year, driven by a 9.7 percent increase among credit unions with more than $500 million in assets, which account for 65 percent of the industry's total assets but only 6 percent of the number of credit unions in the U.S. This group apparently has a bigger appetite and capacity to retain its current originations, while tighter net margins tend to increase minimum rate requirements perceived by smaller credit unions, which in turn directly limits their growth capacity.
Yet, both consumer and mortgage loan originations continue to provide the best relative value option and a higher total return profile for most allocation alternatives. Today's spread differentials, along with projected interest rate conditions and projected growth, are sufficient to absorb a great deal of the implied interest rate risk exposure perceived by most institutions. The challenge for many will remain whether one's concern over perceived risk exposure in the future is greater than the opportunity lost from the 240 to 285 basis point differential in the current spread.
Think Interest Spread Rather than Interest Rate
Three-quarters of credit union earnings are determined by the spread between a credit union's earning assets and paying funds. The net margin of an institution with a 10 percent asset yield and 8 percent cost of funds is the same as an institution with a 3 percent asset yield and a 1 percent cost of funds.
The Federal Reserve has already telegraphed its plan to retain overnight rates near its current 0 to 25 basis points level until the end of 2014. Through its "Operation Twist," it will attempt to keep longterm rates down to remove the disincentive for fi financial institutions to lend when there is enough slope in the yield curve to satisfy their returns without taking on credit exposure. This will keep short-term rates in check for a while, and at the same time, create volatility in the long-term rates.
Let's hope the volatility coincides nicely with the fl ash markets.
Credit Union leaders from around the state carve out time to visit Washington. Pictured are Yvonne De La Rosa, SACU; Les Sachanowicz , SACU; and Mike Maldonado, Randolph-Brooks FCU.
The Post-Election Atmosphere
The results of the November election are still resonating across the nation. Within the fi nancial services industry, credit union advocates can take stock of their victories and assess what the political landscape means to our efforts on both the state and federal levels.
Here in Texas, TCUL PAC supported 65 state legislative candidates, and 62 won election. In addition, through Credit Union Legislative Council (CULAC), we supported 27 Texas congressional candidates, 26 of whom won their races. This involvement was made possible by thousands of credit union employees and volunteers around the state who support the PAC through payroll deductions and other fundraising efforts.
Most importantly, the PAC enabled TCUL to help re-elect key individuals who understand credit union issues ...Read more...
"While most associations and professional societies are not in immediate danger, they will struggle if they cling to conventional
approaches and structures. They will survive but they won't grow. They will function but without vitality. They will have members, but their market share will decrease. They will exist but their influence will decline." - The Race for Relevance
If the one true constant in life is change, it follows that a quest for relevance would matter a great deal to any individual, group, business or association. This is the pivotal point of Race for Relevance , an interesting recent book that proposes radical change for associations. In it, authors Harrison Coerver and Mary Byers suggest a series of challenges to relevance and practical ideas to help stem the tide of its enemy: irrelevance.
Remaining relevant is critical for credit unions today. We must remain relevant – or risk decline.
There are five key credit union relevancy questions:
Injecting a new level of energy and excitement in the movement
The credit union movement is deeply rooted in tradi- tion and history. And while it’s important to preserve our past, we cannot get lost in it. In a rapidly changing and highly-competitive market space, we must be agile, bold, flexible and innovative.
Events such as Bank Transfer Day and Internation- al Year of Cooperatives have certainly drawn more attention to credit unions, resulting in an uptick in membership. However, attracting a younger generation continues to be a real challenge for credit unions. As an aging movement, it’s critical to our future that we inspire young professionals to seek career opportunities in credit unions, in- crease our presence in the market space so that we are better positioned to connect with younger audiences, and aggressively build our infra- structure so we are able to meet the financial services needs of consumers at all life stages. Texas Credit Union League (TCUL) president and CEO Dic...Read more...
Neches Federal Credit Union (FCU)
Neches FCU, which today boasts eight physical branches and 317 shared-branching locations [the credit union joined the shared branching network in 2008], was founded in 1952 by a handful of employees from the Jefferson chemical plant. After nearly 50 years of successfully serving the financial services needs of just one select employer group (SEG), the now-$328 million credit union decided it was time to expand its outreach.
The man that would lead Neches FCU through this transformation was Jason Landry, who had been CEO since 1991 when he assumed the helm at the tender age of 26.
Landry says management, as well as the board of directors, were acutely aware of the risks associated with being a single-SEG credit union.Read more...
Adapt or die.
The dinosaurs discovered this—after it was too late. Unlike their mammal counterparts, they were unable to grow hair and survive the Ice Age. So they became extinct.
It’s not much different in business. A company must adapt to changing consumer demands, or else it will find itself on the trash heap of yesteryear.
Remember the Flip video camera? It seemed like a good idea at the time—an inexpensive digital camcorder—until everyone’s Smartphone was able to record video—then the Flip became disposable. However, it doesn’t have to end that way. Businesses that adapt and differentiate themselves can not only survive, but thrive.
Today we are witnessing a transformation in the financial services industry. Following the meltdown of 2008 and the ensuing bank bailouts, consumers are looking for stability, convenience and lower fees. They have more choices than ever, and the advent of banking online has made it easier than ever to switch an account to another financial institution.
"The most innovative organizations fuse marketing and innovation into an integrated strategy for growth."
— Michael Schrage, MIT
Branding can change a credit union. The key word is "can." Many times a credit union embarks upon a new brand or recreates an existing brand. Perhaps the board, management team or marketing department identifies key targets, develops a new look and even drafts a catchy tagline. But then the brand falls flat. Why? In many cases, the credit union has fallen into "the brand chasm."
What is Branding?
Before explaining the brand chasm, let's first define what branding is. A brand is not an icon. It's not a logo. It's not an identity.
So what is branding? There are thousands of ways to define branding, including:
· "The sum total of a person's thoughts and feelings about an organization."
· "The process of determining your competitive advantages, building an institutional culture, a brand strategy and a business strategy to those advantages, and then communic...
Since the Jan. 27, 2011 effective date of NCUA final rule 701.4, General authorities and duties of Federal credit union directors , credit unions and their trade associations have been scrambling to meet the Rule’s timetable for enhancing Directors’ “necessary financial skills.” What may not be obvious to some is the practical necessity for directors to have a working knowledge of credit union finances.
Here’s a timely example:
The Federal Reserve influences the U.S. money supply through open market operations and establishing the rate for Fed Funds, money placed with the Fed in the form of overnight deposits. Higher interest rates tend to slow the economy and lower rates tend to stimulate the economy (by influencing what it costs for businesses to expand).
As the recession that began in December 2007 deepened, the Federal Reserve reduced the Fed Funds Target Rate in an attempt to minimize economic decline. Since December 2008 the Fed Funds Target Rate has been at a historic low of 0-0.25 ...Read more...
As the most recent U. S. Census campaign was getting underway, the Associated Press reported on the significant impact immigration has had on the minority birth rate in the U. S. Reportedly, minorities make up 49 percent of the U. S. children born as compared to 37 percent in 1990. Demographers projected that 2010 would in fact be the “tipping point” when the number of babies born to minority women would outnumber those born to white women. We’ll certainly be seeing in the very near future statistics that confirm (or dispel) this projection. Given the importance of this particular trend, a number of progressive thinking marketers have already set their sights on the growth potential and subsequent market impact of this vital demographic.
Gary Williams, president and CEO of Unity One CU in Fort Worth is an admirable example of such a proactive leader who has strategically positioned his formerly single-sponsor credit union to expand its traditional focus and to commit to their under...Read more...
Remember the song “Everything Old Is New Again”? Every year in Washington, a decade-long debate rehashes arguments about whether credit unions should be allowed to make more business loans. The rhetoric has intensified and prospects for a legislative resolution remain unclear as the 112 th Congress will be sworn in next year.
Rather than replay the same old song, I want to add new lyrics – a fundamental regulatory perspective – to the discussion: A properly supervised, balanced and prudent member business loan (MBL) program can be a significant benefit to credit union members and small businesses.
Member business lending is an important ingredient in the nation’s efforts to revitalize the economy. I have referred to an increase in MBLs as a “zero dollar stimulus,” with good reason. As an active partner with the small business community, credit unions provide a critically important source of credit. Member business lending stimulates economic growth and job creation, by letting credit uni...Read more...
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