Positive Result Neutral Result Negative Result Economic Overview Current Results Longer Term Outlook RFG Perspective Gross Domestic Product (GDP) Up 1.6% (2nd qtr 2010) Projected 2% to 3% growth for 2010 Positive growth for last three quarters; however, growth will remain modest at best Unemployment 9.6% (August 2010) Likely to remain in 10% range for 2010 Tepid GDP growth will result in unemployment remaining at very high levels Vehicle Sales Up 14.0% (seven months 2010 vs. seven months 2009) 2010 will be lowest year since 1984, except for 2009 Improvement looks promising but coming from historically low levels Housing Starts Up 11.0% (seven months 2010 vs. seven months 2009) 2010 will be second lowest year in history (other than 2009) Likely to remain low for the next several years as we work through excess housing Foreclosures Down 3% (May 2010 from June 2010) 2010 still likely to see highest foreclosure activity in history Subprime has spread to prime; foreclosures will remain high in 2010 Consumer Confidence (Conference Board) 50.4 (July 2010; 1985 = 100) Consumer confidence has been below 100 since Sept 2007 Consumer confidence is slowly improving but not likely to exceed 100 any time soon
Industry Consolidation Continues The number of banks and credit unions have both declined by over 36% since 1994. By 2014 there is likely to be 6,500 banks and 6,100 credit unions. Projection Source: NCUA, FDIC, 2014 estimates by Raddon Financial Group
Industry Net Interest Margins Continue to Decline Margins have declined for financial institutions over the past 15 years. This decline has occurred in both high and low rate environments.
2009 Reversed a Long-Term Growth Trend in Non-Interest Income Source: Raddon Financial Group, CEO Strategies Group
The Hand You’ve Been Dealt CARD Act Debit Card Interchange Overdraft Fee Income Legislation, Legislation, Legislation Dodd-Frank CFPB Great Recession Loan Losses Insurance Premiums NCUA
Turning your Hand Around ODP Opt-in Operational Efficiency: Revenue & Expense Loan Growth Gen Y Social Media Delivery Channel Optimization Small Business Rational Pricing
Reg E and Dodd-Frank:
The New Reality
The Dodd-Frank Act: Implications for the Financial Services Industry
Major Implications of the Dodd-Frank Bill
Fannie and Freddie were not addressed. This leaves the mortgage market still in fundamental disarray.
Debit card interchange restrictions will have a significant negative impact on most community financial institutions.
Consumer Financial Protection Bureau (CFPB) has the potential to become the next political playground for legislators and regulators, much as CRA is now.
CFPB could also become basis for ultimate “single regulator” for the financial services industry, which could be damaging for specialty industries such as credit unions.
An unintended consequence is likely to be lessened access to credit for consumers.
Much will depend upon regulatory interpretations of the bill.
A significant impact will be a substantial increase in compliance costs for financial institutions. This is likely to increase the consolidation of the financial services industry, especially among the smallest players.
The Dodd-Frank Act: Projected Impact on Credit Unions Provision Impact 1 Creates the Bureau of Consumer Financial Protection, a New Consumer Watchdog Agency Housed within the Federal Reserve Board High 2 Establishes a New Financial Stability Oversight Council, Charged with Identifying and Responding to Emerging Risks in the Financial System Medium 3 Establishes New Regulation of Debit Card Interchange Fees High 4 Restructures the Federal Regulatory Jurisdiction over Banks and Their Parent Companies, and Abolishes the Office of Thrift Supervision (OTS) Low 5 Adopts New Standards and Rules for the Mortgage Industry Medium 6 Grants the Treasury, FDIC, and the Fed Broad Powers to Seize and Wind Down “Too Big to Fail” Financial Institutions (Including Non-Bank) in an Orderly Fashion None 7 Allows Depository Institutions to begin Paying Interest on Demand Deposits (Small Business Checking) Low 8 Tasks the Federal Banking Agencies with Adopting New and Enhanced Capital Standards for All Depository Institutions Low 9 Permanently Increases the Deposit Insurance Limit to $250,000 per Depositor per Institution for Each Account Ownership Category Low
Require the Federal Reserve Board to ensure debit card interchange fees are “reasonable and proportional”
Institutions with assets less than $10 Billion excluded from the interchange restriction
Allow merchants to offer discounts for a particular form of payment (cash v. debit v. credit) or for use of a particular card network (Visa v. Mastercard)
Allow merchants to set minimum debit card transaction levels
Regulating Debit Card Interchange Fees
Reregulation: What is the appropriate response?
Step 1: Maximize Opt-In Step 2: Evaluate Product Lines Step 3: Back to Basics What Percentage of your Members are Opting In? Can Free Checking Survive? Relationship Development and Operational Efficiency
$750 million Financial Institution in Southeast Region
30,000 retail debit card holders
Direct Mail in January yielded only 8% response
Didn’t wait for system updates. Created temp Access db to track responses
Started Teller focus end of February. By mid-May, had been in contact with 88% of all debit card holders. Of those,
96% opted in (98.28% of habituals)
Tellers were paid $1 for each “decision”
approx. $24,000 in incentives paid
Branch FTEs also did outbound calling during down time
Can Free Checking Survive?
Threats of future regulations likely to continue:
Consumer Financial Protection Bureau
What types of product changes might be necessary for your institution?
Minimum Balance fees
Negative Balance Grace Zone
Limiting ATM Surcharge Rebates
Opportunity to begin offering ODP Coverage on Debit Card/ATM?
Evaluate Product Lines
Financial Impact of Reg E and Fee Structure Changes Based on the consumer responses for each NSF group, the average institution should realize two-thirds of their past overdraft income. Based on consumer reactions to various fee structure scenarios, the typical institution would only retain 48% of past OD income if the fee is reduced by $10.
REACTION TO A CHECKING ACCOUNT REQUIREMENT Source: RFG National Consumer Research (SPSG), Spring 2010
Difference in Impact of an Annual Fee On Debit and Credit Rewards Programs Source: Raddon Financial Group, National Consumer Research
Top 10 Largest Retail Banks - Free, if… As-of 9/2/2010 Free Checking, if… Direct Deposit or 5+ monthly Debit Card Transactions eBanking: Deposits & Withdrawals made electronically or at ATM; and E-Statements required MyAccess: Direct Deposit or $1500 min avg balance Combined Avg Balance of $1500 in Checking or Savings Value Checking (no bill-pay): Direct Deposit or $1500 avg daily balance Custom Mgt Package: Checking and Savings packaged: $1,000 balance; or $25 auto transfer to Savings; or Direct Deposit FREE (no requirements) – Includes Free Debit Card Rewards FREE (no requirements) – Includes Free Debit & Bill-Pay Rewards; ATM rebates when Avg Monthly Balance $2,000+ Direct Deposit or $1500 Deposit Balances or $5000 Combined Balances FREE (no requirements) – Includes Free Debit Card Rewards $100 Min Daily Balance (waived for 1 st 12 months); Includes Debit Rewards and ATM Rebates FREE (no requirements) – Includes Free Debit Card Rewards
Should you continue to offer free checking?
If “Yes”, how do you take advantage of an evolving marketplace?
If “No”, what changes should you make to your checking product line?
Offer a menu of checking accounts
Minimum Balance Fees
Behavioral / Channel Pricing
How should the debit card change?
Annual fees for Debit Rewards programs?
Off-setting revenue losses with increased account activity
Checking Decisions You Need to Address
Evaluate other areas to make up the revenue:
Accounts with High Relationship Potential
Cross-sell additional products and services
Accounts with Low Relationship Potential
Consider alternative fees to off-set expense burden
Back to Basics
Delivery Channel Optimization:
How to Drive Efficiency
REVENUE PER HOUSEHOLD PROFILE: Top 10 “Relationship” Institutions by Asset Size and Peer Group CRITERIA: Ten Highest Average Percentiles in Services and Balances per HH SERVICES PER HOUSEHOLD EXPENSE PER HOUSEHOLD BALANCES PER HOUSEHOLD EFFICIENCY RATIO Build Relationships to Drive Efficiency High Asset Low Asset $750M Community Non-Community $31,055 86 73.9% 59 $1,154 94 $938 93 $826 87 $788 84 $556 25 $646 23 2.79 97 $623 12 2.49 88 2.45 86 $49,386 96 $31,861 88 $570 20 2.57 91 $37,629 91 59.1% 86 71.6% 64 61.0% 85
Retail Banking Space Dominated by Three Players The U.S. banking system has become more oligopolistic – three major players dominate the US banking space. Source: FDIC
Bank Branch Growth Has Declined Source: FDIC 2007 was the heyday for bank branch expansion with the addition of 2,443 new bank branches. 2009 actually saw a shrinkage in the number of bank locations in the US.
Credit Union Branch Growth Is Also Down Source: NCUA Credit union branch locations grew steadily through the 2000s until 2009, where we saw a decline in the number of credit union locations in the US.
Online Banking and Lobby Trends Source: RFG National Research, Fall 2009 Since 2000 we have seen the usage of online banking grow from 8% of households nationwide to 54%. In that same period, usage of lobby or drive-up facilities has declined only very slightly. Delivery channels tend to be complementary, not substitutive.
Gen Y Usage of Lobby and Drive-up is Not Significantly Different Than Other Groups Source: RFG National Consumer Research
Branch Availability and Service Quality Equally Important in Selecting Primary Institution Source: RFG National Research, Fall 2009
Electronics Important to Younger Demographics, But Branches Are Still Important Source: RFG National Research, Fall 2009
Growth Potential – Existing HH & New HH growth
Sales Performance Metrics
New households with checking
Service Quality - Provide feedback loops
Set realistic performance goals and reward for performance
Growth goals should be specific to each branch based on demographics of members and the market
Don’t measure on things that can’t be controlled at the branch level
Create both individual and group goals
Provide the tools essential for success
Lead presentment tools
Staff sales aptitude testing and training
Branch manager becomes the Branch CEO
More authority / more autonomy
Greater performance accountability
Performance incentives should be significant
Steps to Optimizing Branch Performance
Can Gen Y Revive Us?
The Generational Segments Traditionalist Baby Boomers Gen X Gen Y 2.7 million births per year (MBPY) 3.9 MBPY 3.4 MBPY 3.8 MBPY Avg. Household Deposits: $32K $16K $11K $33K
Generation Future Loan Demand Source: RFG National Consumer Research Make Sure They Are Over 21
Cell Phone Internet Data Plan Ownership Source: RFG National Consumer Research
Activities Conducted Online Source: RFG National Consumer Research
Delivery Channels Used Source: RFG National Consumer Research
Social Network Sites are Used by All Generations, but Gen Y leads the way Source: RFG National Consumer Research, Spring 2010
Aspects of a Gen Y Plan
Trans-generational marketing efforts – use your strength with Baby-boomers to market to their Gen Y offspring.
Segment the Gen Y market and develop distinct strategies for each group.
Independents (22 – 30 years)
College age (18 – 22 years)
Dependents (13 – 18 years)
Tie product design in with delivery.
E-statements and debit card usage have high value
Social networking should focus on information and education
Social networks are a marketing channel, not a delivery channel
Use relationship pricing to build loyalty.
The New Reality Redux
The Shifting Growth Paradigm
The economy is not likely to grow in any substantial fashion in 2010 …
… or 2011
… or 2012.
Organic growth will be non-existent.
Conclusion: Growth will be dependent on stealing market share from competitors
Growth Rates in 2009 Source: FDIC, NCUA
The Personal Savings Rate is Rebounding Personal savings rates (savings as a percent of disposable income) have fallen significantly below the long-term historical rate of 7% (from 1946 to 2008) since the early 1990s. The personal savings rate rose in 2008 and 2009, and suggests a de-leveraging on the part of the consumer. This is good news long-term – BUT the impact on loan growth will continue to be felt. Actual Projected Source: Bureau of Economic Analysis
The fundamental question:
HOW DO WE GROW OUR SHARE OF THE MEMBER’S WALLET?
Why Consumers Are Loyal To Their Primary Financial Institution Credit Union Issue : Too much of the value proposition is built on price. We have to move beyond philosophy of “one size fits all.” Source: Raddon Financial Group, National Consumer Research , Spring 2010
Members Use Multiple Institutions 1.7 Average 2.6 Average 1.4 Average 1.4 Average Source: Raddon Financial Group, National Consumer Research
Primary Customers Provide A Greater Share Of Wallet Source: Raddon Financial Group, Member Survey
Factors Behind Designating a PFI Source: Raddon Financial Group, National Consumer Research
Credit Card Opportunity
The New Reality in Credit Cards
CARD act forcing many national card offerers to alter their account structures, potentially making them less profitable
Renewed focus on using the CC as a relationship product
Opportunity for Credit Unions to compete for the business and steal market share
Unprofitable card portfolios and the inability to compete with the seemingly unlimited marketing dollars of the Big Banks forced many credit unions to sell their card portfolio in recent years.
Is it time to get back in?
(assuming non-compete clause time period has expired)
Historical Look at Consumer Debt Revolving Consumer Debt (majority of which is Credit Card debt) has risen consistently since the FDIC started tracking this data in 1968…until now. The recent decline in revolving consumer debt is unprecedented.
Services per Household by Product Type Source: CEO Strategies Group – National Average
Understanding the composition of the credit card portfolio is important in identifying what drives profitability and relationships for different types of card users. Based on data from RFG’s Credit Card Analysis program, the average percent of cardholders within each of the five Credit Card Segments is shown on this page. Source: RFG Credit Card Analysis
Credit Card Household Relationship While the strength of the card relationship is important, it is also important to look at the total relationship of these households. In many cases, the card itself is a drain in terms of account profitability, but the overall relationship with the member is very strong. Source: RFG Credit Card Analysis The value of the Relationship: Only 2 of the segments are profitable at the account level, yet overall Household Profit is positive across all segments.
Mortgage Case Study An Incentive Compensation Plan That Works
$755 Million Community CU in Midwest
Most mortgages sold to secondary market, servicing retained
Originate mortgages in 10 states
9 total originators, 4.5 processors
Hired several established lenders when local bank sold
Lenders do first mortgages only (no accounts/consumer loans/equities)
Centralized underwriting process, originator attends each closing
Priced to make 50bps off sale (today 100 bps)
Average rates compared to competition
Underwriters have discretion on matching competitive offers
Compete with Wells, Associated Bank, US Bank and many CUs
Survey new mortgage members to ask them about their experience
Established plan in 2003
$30 to $35k base, average 2009 incentive comp was $73k
Highest paid lender made $125k total in 2009
No cuts to the base pay when the plan was rolled out
17bp on new mortgages, 13bp on construction loans, 5 bp on refis
Processors and Support Staff
If monthly volume is 90% of budget each FTE gets $1 per total loan closed
If monthly volume is 110% of budget each FTE gets $2 per total loan closed
If monthly volume is 130% of budget each FTE gets $3 per total loan closed
20 closed mortgages per originator per month (100 th percentile)
11% market share in 2003, 24% in 2009
$328 million originated in 2009 ($198 mil was previous high)
Highest 2009 volume per FTE = $83 mil, $69 mil, $64 mil
2010 volume expected to be $230 million
Haven’t lost a lender the last 5 years
Survey all mortgage members, scored 6.6 out of 7
Small Business = Big Impact
Small Business Remains Pessimistic Small businesses were asked how long they predict the economic downturn will last. Their estimates have lengthened over the last 12 months. Source: RFG Small Business National Research, Spring 2010 4% 4% 4% 12% 12% 10% 19% 24% 18% 29% 23% 27% 30% 27% 34% 6% 8% 7% Percent Citing Less Than 6 Months 6 to 9 Months 9 to 12 Months 12 to 18 Months More than 18 Months Do Not Know Spring '09 Estimate Fall '09 Estimate Spring '10 Estimate
CREDIT DENIALS EXPERIENCED IN PAST YEAR Source: RFG Small Business National Research, Spring 2010
INDUSTRY PRICING PERCEPTIONS Source: RFG Small Business National Research, Spring 2010
PFI DESIGNATIONS 39% 23% 22% 7% 3% 4% Percent Cited as PFI Nationwide Bank Local Bank - Community Bank Regional Bank-Multi- state But Not Nationwide Credit Union Credit Card Company Do Not Have One Primary Provider Institution Type Designated as Business PFI Source: RFG Small Business National Research, Spring 2010
SATISFACTION LEVEL WITH PFI BY TYPE OF PFI Source: RFG Small Business National Research, Spring 2010
Pricing is #1 Reason for Dissatisfaction Source: RFG Small Business National Research, Spring 2010
IMPORTANT CHARACTERISTICS FOR BUS. BANKING CONTACTS Source: RFG Small Business National Research, Spring 2010
FIRMS ARE ENGAGED IN ONLINE ACTIVITIES Source: RFG Small Business National Research, Spring 2010
SMALL BUS. VS. CONSUMER MOBILE BANKING USE/LIKELIHOOD Source: RFG Small Business National Research, Spring 2010
Small Business Summary
Offers significant opportunity for increased NII and improved deposit margins.
Most Small Business banking relationships are based on deposit services, even though 55% of businesses utilize credit cards.
Small Business relationships fit well into a credit union’s consumer sales / service business model.
Convenience / Delivery
Basic lending services
Small Businesses are not impacted by pending new financial industry regulation and / or legislation.
Key Action Items
Adopt a “Back to Basics” in how you manage.
Better margin management
Grow alternative sources of non-interest income
Enhance focus on member development and profitability
With continuing margin compression and reduced fee income, improved operational efficiency is paramount.
Utilize technology to manage costs more effectively
Continue to focus on improving your margin income on deposit accounts
Key Action Items
Impact of technology on the member continues to grow.
Gen Y is doing their banking in fundamentally different ways
Credit union needs to be able to deploy new technologies rapidly
Develop a checking account growth strategy for the new environment.
Create a merger strategy.
Desired geography / markets
Desired member profile
Key focus is building the Member’s Share of Wallet .
Look to create value in your services that goes beyond rate.
Create linkages in account design between products and channels.