One CU's Keys For Solid Net Earnings

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HARRISBURG, Penn.-As many credit unions struggle to find revenue sources to keep pace with assessments and regulation, Pennsylvania State Employees CU is enjoying its best year ever in terms of net earnings.

The $3.7-billion credit union expects to post $28 million in net earnings by the end of 2010 and 1% ROA-and those are post-NCUA assessments numbers. A typical earnings year for PSECU is $20 million.

CEO Greg Smith cited solid underwriting, cost control, branchless operations, and a strong performing credit card portfolio as the major performance drivers. But before digging into the numbers behind the results, Smith told Credit Union Journal that the CU's philosophy of treating members fairly and building loyalty has resonated with members during the recession.

"Some of the decisions we have made going back many years have laid a foundation of trust with our membership that is really paying off," Smith said. "We're enjoying an accumulation of trust that's come to a head during these tough times. In a challenging economy, people go to a financial they can trust."

What has led to the high level of member trust, according to Smith, is providing members with the feeling they are getting a fair deal. PSECU keeps things simple-no risk-based pricing except for mortgages sold to Fannie Mae, a 9.9%, fixed Visa rate that has not changed for years, and almost no fees. PSECU has never charged for overdrafts, and a $20 late charge is the only fee on its credit card. "We make it very clear to members that the things we do are in the mutual interest of the credit union and the membership," Smith pointed out.

Rates Reflect Business Approach

The business approach is reflected in PSCU's rates: As of press time, new and used auto loans from three to six years are 4.99% APR, and a 30-year fixed mortgage was 4.875%. A one-year CD paid 1.25% APY. "Where would you want to do business?" asked Smith. "A place that you feel gets you every time you go back, or a place where you know you will get a fair deal?"

The strong member support was apparent this year when PSECU asked members to reach out to Congress to oppose the interchange amendment. Smith said members sent more than 75,000 e-mails to Congressmen. "I think nationally, the total number of e-mails to Congress against this bill were 500,000 to 600,000," Smith said. "So a large percentage came from PSECU."

Outside of a strong member following, some specific business processes are contributing to the excellent year. Solid loan underwriting has kept delinquencies at .57% through May and net charge-offs at 1.03%. "Our focus is on consumer credit-autos, VISA, signature-with mortgages accounting for less than 20% of assets," said Smith, who also credited level home values throughout the state.

PSECU has over 183,000 Visa cards, making it the fifth-largest card issuer among CUs in the U.S. Smith said the thinking that the economy is driving more people to PSECU and getting members to use more services is apparent in the performance of its credit card portfolio. "We grew the portfolio by 22% last year. As members were getting notices in advance of the February 22 effective date for the CARD Act, our credit card program mushroomed."

Monthly, the card portfolio produces $653,000 in interchange revenue and $2.5 million in finance charge revenue. Smith said 72% of members carry a balance.

Smith acknowledged that if other CUs are looking to emulate PSECU's business approach, it will be difficult to match its efficiency without the branchless model. The statewide PSECU has one main location and a series of small offices inside colleges. It relies heavily on its sophisticated online banking program-and has offered mobile banking since 2001. "Our member-to-employee ratio is 680-to-one," Smith said. "The self-service model really helps."

Despite PSECU's already efficient operations, Smith said that during the recession the CU realized it had to cut costs. Through measures primarily generated by employees, PSECU's year-to-date expenses through May were $350,000 below the same period in 2009. The CU has dropped its expense ratio as a percentage of assets by one percentage point to 2.25%. "We're working harder than ever to manage costs," Smith said. "Staff has done an incredible job. We basically told people that we'd protect their jobs if they'd pull together and find ways to do more with less. When financial institutions were dropping like flies in 2008, it was a message that really resonated with staff. We didn't cut salaries, didn't cut benefits, didn't furlough anyone."

Branchless Model Dovetails With Mobile Movement

With capital at 8.4% and a branchless model that fits with the increasing move toward mobile, Smith said PSCU is positioned well for the future. He does, believe, however, that more credit unions will see the value in cutting back on branches. He also believes that credit unions, should not get caught up in a rush to persuade members to opt in for NSF fees. "Stick with the cooperative principles that CUs were founded on. When we start gouging members for NSF fees at Starbucks and the ATM, I think we've crossed the line. You'll also damage your trust relationship with your members and that will hurt business in the long run."

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