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CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group 2013
Boosting Non-Interest Income to Serve More Members, Increase Revenue & Improve Your Capital Ratio
Annual Meeting – April 2-4, 2014 Williamsburg, Virginia
Presented by Hendrix Niemann Managing Director – Practice & Wealth Management CUNA Brokerage Services, Inc.
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Importance of Non-Interest Income (NII)
Agenda
Greatest Untapped (or Under-tapped) Source of NII: Investment & Insurance Products
How and Why a Robust Investment Program Leads to Increased “Stickiness” and Member Loyalty
Are Credit Unions in the Advice Business or the Product Business?
Demography and Longevity Meet The “New Normal” Economy
Fulfilling the Credit Union’s Mission & Higher Purpose
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– Filene Research Institute 2012 study
NII is particularly important because, unlike income from loans and investments, it usually does not depend on capital for its creation, nor does it put capital at risk in its implementation …
It goes straight to the bottom line and does not harm the capital ratio; it enhances it.
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Net Interest Margin vs. Non-Interest Expense / Average Assets
0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
NIM Non-Interest Expense Non-Interest Income
3.19% 2.94%
1.43%
Source: NCUA 5300 reports
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ROA vs. ROA Less Non-Interest Income
Basis Points
86
- 57
Return on Assets (ROA)
ROA less Non-Interest Income
Source: NCUA 5300 reports
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History – Non-Interest Income
Source: NCUA 5300 reports
12.7
5%
14.8
2%
17.9
6%
19.3
7%
19.7
2%
18.8
2%
18.4
4%
19.2
5%
21.4
4%
22.9
6%
24.2
4% 28
.11%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Non-Interest Income / Total Income
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Some Examples of Best Practices to Increase NII
“Premier Checking Account” fee – includes −Free checks, ID fraud protection, free wire
transfers, free stop-payment service, refund of non-credit-union ATM fees, etc.
Identity Protection Skip-a-Payment Fees Prepaid / Reloadable Debit Cards −Fee for initial card issuance then small fee to reload Paper Statement Fee (but this is non-member-friendly) Overdraft Protection From Savings Account
(Tie-In) Fee
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Greatest Non-Interest Income Opportunity:
Investment and Insurance Products
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Investment and Retirement Balances Swamp Deposits for the Average HH
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“The Value of an Investment and Insurance Customer”
Strategic Business Insights study, 2012
Overall, banks and credit unions have not done a very good job of penetrating the opportunity of households that are prone to buy investment and insurance products through them…
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Awareness is the Major Problem for Credit Unions and Community Banks
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Huge Opportunity for CUs to Attract Investment Accounts
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How Selling Investments Benefits the Credit Union
$55,000 Average Investments Under Management per Household
$177 Net Income per Investment Household from Investment Sales
– $165 Contrast this with the Losses per Household on CDs
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Financial Impact – Converting CDs to Investment Accounts
Credit Union Assets $500.0M Credit Union Deposits $458.0M Credit Union Loans $275.0M Loan to Deposit Ratio 60% Member Households 30,000 CD Penetration 8.0% CD Households 2,400 Net Interest Margin on CDs -0.48% Avg. CD Balance per CD HH $25,000
Hypothetical Case Study From Raddon Financial Group
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Financial Impact – Converting CDs to Investment Accounts
CD Conversion Rate 50%
Net Profit per Investment HH $177
Converted CD Balances $30.0M
Profit Impact $356,400
New Loan to Deposit Ratio 64%
ROA Impact 7 bps
Hypothetical Case Study From Raddon Financial Group
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Financial Impact – Converting CDs to Investment Accounts
Source: Raddon Financial Group (RFG) – CEO Strategies Program
Raddon analysis illustrates the impact of converting half of CD balances into investments − This is highly optimistic, in my view
The loan to deposit ratio increases from 60% to 64% and ROA increases by 7 basis points
Profit impact does not take into consideration any operating expense reduction that could be achieved because of a lower number of CDs
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Financial Impact – Converting CDs to Investment Accounts
Source: Raddon Financial Group study, May 2012
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It’s Not Only About the Money
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… brokerage and insurance customers are more valuable and more loyal than customers who have not purchased an investment or insurance product.
“The Value of an Investment and Insurance Customer,” Strategic Business Insights study, 2012
Selling existing customers an investment or insurance product not only increases fee income, it also increases customer loyalty much more than selling them another banking product.
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An investment relationship with a credit union increases member loyalty by more than 40 percent, which helps cement the overall member relationship and lock in additional years of revenue from credit union services.
Source: Kehrer Saltzman & Associates study, “The Opportunity for Credit Unions in Investment and Life Insurance Services”, July 2013
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Almost two-thirds of credit union member households would prefer their credit union to be their Primary Financial Institution (PFI) if it offers a full range of financial services
Source: Kehrer Saltzman & Associates study, “The Opportunity for Credit Unions in Investment and Life Insurance Services”, July 2013
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In the credit union industry, we need to be asking ourselves …
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Are We in the Advice Business or the Product Business?
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The Perfect Storm
Demography and Longevity Meet the “New Normal” Economy
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In the past 800 years, there are no documented examples of an economy that had to emerge from a financial crisis while simultaneously absorbing the effects of an aging population.
Source: Associated Press, 02/09/14, interview with economist Carmen Reinhart
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Source: AdvisorOne newsletter, 5/10/2013
Longevity is the defining challenge of our age.
– Laurence Fink CEO, BlackRock Investments (largest asset management firm in the world)
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– Dr. Ken Dychtwald Founder & CEO, AgeWave
Source: Dychtwald keynote presentation, Retirement income Summit, May 2013
Two-thirds of all the people in the history of the world who have lived past the age of 65 are alive today.
People didn’t used to ‘age.’ They died.
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What happens when an increasing share of a country’s GDP goes to support an aging and no-longer-productive population?
(We’re about to find out.)
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Demographic Realities
Baby Boomers 1946 to 1964 77-78 million
Generation X 1965 to 1983 45 million
Generation Y 1984 to 2002* 80 million
Generation Z 2003 to 2021 ??
* a/k/a Millennials (sometimes dated 1980 to 2000)
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Otto von Bismarck Prussian (German) Chancellor 1862-1890 Established world’s first old-age social insurance program in 1889. Retirement age initially set at 70; changed to 65 in 1916.
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Longevity Risk
50% Probability of Current 65-Year-Old Living to Given Age
Age Years in Retirement
Male 85 20 years
Female 87 22 years
Couple 91* 26 years
* One of two will live to age 91
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Baby Boomers’ Money Will Be Leaving the Credit Union
What is your plan for replacing those assets?
Baby Boomers are about to shift in massive numbers from accumulation – depositing, saving, and investing – to spending down their assets (“decumulation”)
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Baby Boomers’ Money Will Be Leaving the Credit Union
What is your plan for retaining the assets that are left to the next generation?
Baby Boomers will not be borrowing money; they’ll be spending most of what they now have
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Meet Your Future Members
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What do the following all have in common?
115,000 janitors
83,000 bartenders
323,000 restaurant servers
80,000 heavy-duty truck drivers
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What do the following all have in common?
115,000 janitors
83,000 bartenders
323,000 restaurant servers
80,000 heavy-duty truck drivers
All have bachelor’s degrees from four-year colleges
(P.S. This is more than the total number of uniformed personnel in the U.S. Army.)
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“ Hi, I’m Marty and I’ll be your waiter for the next 20 years.”
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Millennials set to emerge as the dominant demographic group in the U.S. by 2025
Source: Financial Advisor magazine online, June 6, 2013
Will represent more than 50% of the labor force
They will be the ones depositing, saving, borrowing and investing
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Millennials are increasingly skeptical about America and our economic system
50% of Americans over 65 believe America is the greatest nation on earth, but only 27% of Americans 18-29 believe that
Measures of support down across the board for…. − Free market capitalism − Chances of moving up the economic ladder − Identifying themselves as being “middle class”
Demography Meets the New Normal Economy
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Only 11% of employed Millennials say they have a career (as opposed to “just a job”)
An entire generation is putting off the “rituals of adulthood” − Rates of marriage, home purchases,
starting families all down
Demography Meets the New Normal Economy
Source: Wall Street Journal, 9/14/13
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Demography Meets the New Normal Economy
Millennials are the first generation in history to graduate from college with massive student loan debt − Student loan balances tripled from
2004-2012 to more than $1 trillion − More than 40% of 25-year-olds
have student debt – average amount owed is $25,000
− Student loan payments not available to be spent in the economy
Source: Wall Street Journal, 9/14/13
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Demography Meets the New Normal Economy
Drag on the economy caused by parental college loan debt
Trend not yet fully
understood:
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Increasing Non-Interest Income while …
… fulfilling the Credit Union’s Mission and Higher Purpose
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Helping Members Go Through the “New Normal” Retirement
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Three Phases of Retirement 1935-Present
The Golden Age is not coming back … But many of your members think it will
Source: Ken Dychtwald, interview in Investment Advisor magazine, December 2011
Retirement 1.0 1935 – 1975
Retirement 1.5 1975 – 2008
Retirement 2.0 2008 – ???
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Significant gap – Between what retirees (and soon-to-be-retirees) want it to be like and what it may be like
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Main Concerns of Those in Retirement
According to Allianz Insurance Company…. 61% of those in retirement fear
outliving their assets 57% of those in retirement fear that
their nest egg is not large enough
According to new Merrill Lynch study…. Health and healthcare (76%) Running out of money (49%) Being a burden on their family (36%)
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#1: Help members to visualize their future
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Given your age, what transitions, what challenges, positive or negative, both planned for and unplanned, might you encounter in the next ten years? The next twenty years?”
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#2: Help members understand when they can retire and how much money they can spend
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#3: Help members understand how much money they will need for healthcare in retirement
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Fidelity Investments says $240,000 for a currently 65-year-old couple Employee Benefit Research Institute says − Married Couple / Median $163,000 − Married Couple / 90th Percentile $283,000
Amount of Money Needed For Healthcare in Retirement
Note: Does not include or account for long term care; costs associated with early retirement; increasing life expectancy; innovations in medical technology; or changes in current Medicare law.
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At least 70% of people over age 65 will require some long-term-care services at some point in their lives. And, contrary to what many people believe, Medicare and private health insurance programs do not pay for the majority of long-term-care services … Planning is essential for you to be able to get the care you might need.
Planning for Long Term Care is Essential
National Clearinghouse for Long-Term Care Information, U.S. Department of Health and Human Services (www.longtermcare.gov)
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#4: Help members understand their Social Security and Medicare options
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THAT is the way to …
Increase non-interest income Retain inherited assets Fulfill the credit union’s mission
and higher purpose
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Closing Thoughts
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Three key elements for all this to happen…
60 60
Senior Management and Board buy-in and commitment
#1
61 61
Commitment to a program of member education and helping members navigate challenging economic times
#2
62 62
Excellent marketing program to fix the “awareness problem”
#3
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Awareness is the Major Problem for Credit Unions and Banks
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Conclusions
1) Non-interest income continues to grow in importance to credit unions
2) Other than NSF and interchange fees, insurance and investment products are the most important fee-generators for credit unions
3) Credit union members who purchase insurance and investment products are more loyal and more valuable
4) The opportunity for credit unions is significant
Average penetration is only 3% while nearly half of members have investments elsewhere
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Conclusions continued
5) Building member awareness is critical 6) Success in building non-interest income requires…
Leadership involvement (senior management + board) Marketing Commitment to member education Commitment to helping members navigate
challenging times 7) Growing non-interest income (the right way) fulfills
the credit union’s mission and higher purpose It’s good business and good for business
66
Thank You
© CUNA Mutual Group 2014. Reproduction, adaptation or distribution without permission of CUNA Mutual is prohibited.
Hendrix Niemann Managing Director Practice & Wealth Management CUNA Brokerage Services, Inc. 910.792.9200 (office) 910.987.9399 (cell) [email protected]
