Latino Community pays high savings rates on money market and share certificates to attract individual and institutional deposits.
High loan rates offset the cost of funds to create a sustainable model aimed at helping members attain financial security.
Loan rates are higher than mainstream markets but much lower than typically available to LCCU’s target market of borrowers with no credit history.
Both tactics are part of an overall strategy aimed at building the business by building trust.
Latino Community Credit Union ($310.7M, Durham, NC) needs a lot of deposits to fuel its loan operation.
CU QUICK FACTS
Latino Community Credit Union
Data as of 06.30.18
HQ: Durham, NC
12-MO SHARE GROWTH: 18.8%
12-MO LOAN GROWTH: 23.3%
LCCU serves a generally low-income membership that has limited savings and a big need for loans from a trustworthy financial partner. The 18-year-old credit union has responded with loan and deposit growth rates that both regularly exceed industry averages.
The North Carolina credit union has long had a loan-to-share ratio north of 100% more than 110% in the second quarter this year, in fact and it relies primarily on member deposits for the liquidity to keep that lending machine humming.
Those members come in two sizes: individual members responsible for an average second-quarter regular share balance of $3,221 (the average for all U.S. credit unions is $10,499) and institutional members that had an average share certificate balance of $107,821. That’s the highest among the 354 credit unions nationwide in the $250 million to $500 million asset class, according to data from Callahan & Associates
Our members are low income so their savings capacity is low, says Juan Canal, LCCU’s senior vice president of finance. But our field of membership allows other credit unions, foundations, and non-profits to be members, so we receive deposits from these institutions to complement our funding strategy.
Our members are low income so their savings capacity is low. But our field of membership allows other credit unions, foundations, and non-profits to be members, so we receive deposits from these institutions to complement our funding strategy.
LCCU attracts those funds by offering above-market rates. Currently, that includes 1.55% for share certificates. The peer group average is 1.21%. The average for all credit unions regardless of size is 0.70%.
Money market rates also are higher than average 0.90% versus the national average of 0.18% and the credit union has been encouraging individual members who can afford it to move funds there from regular share accounts, which are currently paying 0.20%.
That’s helped offset a bit of a decline in share certificate growth caused by credit unions and other financial institutions that have placed deposits at LCCU having to take back those funds to deal with their own liquidity needs.
Paying such rates for deposits raises the credit union’s cost of funds. In the second quarter that was 1.30% for LCCU compared with 0.52% for its asset-based peer group and 0.70% for all 5,596 U.S. credit unions.
LCCU compensates for that with higher than average loan rates, such as 14.50% for credit cards compared with the national credit union average of 6.55%. Its average loan yield, in fact, is 6.82%. The national average for all credit unions: 4.61%.
Our loan rates are high compared to mainstream markets but for our market the majority of whom come to us with no credit history they’re the lowest we know of, Canal says.
The net result is a credit union that regularly posts high ROA, including 2.52% in the second quarter, and an efficiency ratio of 68.50%, well below the 84.63% posted in the second quarter by the average credit union its size.
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CORE DEPOSIT GROWTH
Latino Community Credit Union’s core deposit growth (money market, regular shares, and draft shares) consistently outpaces that of the average credit union. Its year-over-year rate of 18.94% placed in the top 5% of all U.S. credit unions regardless of size in the second quarter of 2018. The average rate for all 5,596 credit unions was 5.85%.
MONEY MARKET SHARE GROWTH
Money market share growth skyrocketed after Latino Community began encouraging members to move funds from regular shares and share certificates to the higher yielding product. The year-over-year rate for the second quarter of 2018 was 31.39%. For all U.S. credit unions, the growth rate was 2.16%.
Latino Community’s loan growth has consistently bested the national average. In the second quarter, it was 23.27% year-over-year, compared with 10.07% for the 5,596 U.S. credit unions, according to data from Callahan & Associates.
COST OF FUNDS
Latino Community’s cost of funds also has been consistently above average, including 1.30% in the second quarter, compared with 0.70% for all U.S. credit unions.
Latino Community’s loan-to-share ratio has been well above the industry average for the past five years, and the credit union has been completely loaned out for the past 18 months with a ratio of more than 100%. At second quarter, it was 110.89%, compared with 82.89% for the average U.S. credit union.
RETURN ON ASSETS
Latino Community Credit Union’s strategy of paying more for deposits and charging higher loan rates than the average credit union has proven to be sustainable. Its second quarter ROA was 2.52%, compared with 0.90% for all U.S. credit unions.
Behind all those numbers is a legacy of trust the credit union has built since it was founded by The Support Center, El Centro Hispano, State Employees’ Credit Union ($38.4B, Raleigh, NC) and Self-Help Credit Union ($957.7M, Durham, NC) in 2000 as a safe place for Latinos to save their money, access credit, and build wealth.
How To Reach Minority Households
The Filene Research Institute recently reported on the results of an 18-month test of lending products aimed at meeting the needs of minority households.
Adam Lee, incubator director, says the conversation around building trust is the same for borrowing as it is for saving. The report chronicles the results of the Filene pilot project in which 40 credit unions made more than 58,000 loans to 18,559 underbanked households.
The report draws two important conclusions for credit unions:
- Rates offered by credit unions will likely be substantially better than those offered by alternative financial service institutions.
- The long-term goal of credit unions offering these loans is to help consumers get into a better financial position so they can take advantage of lower-cost products in the future. These products can be a short- and long-term win for all, but credit unions must ensure they don’t compromise their own financial stability by offering such deals.
Download the full report by here: Reaching Minority Households Incubator.
One raw impetus was the series of robberies of cash-carrying Latinos on paydays.
The community decided the best way to keep their money safe was to deposit it at a credit union that catered specifically to their needs, Canal says.
Most of the credit union’s member growth since then is attributable to word-of-mouth, to a reputation built one member at a time.
We take much longer than traditional financial institutions to understand a member’s needs and explain the products we think will better satisfy those needs, Canal says.
Canal says that level of trust has become the linchpin for the credit union’s ability to grow across the Tarheel State as it serves a fast-growing Latino population.
Our mission is to offer ethical products and education to empower communities, Canal says. We take it very seriously, and as a result we build trust with the members in every interaction we have.
The credit union has run a couple of CD promotions that encouraged some undecided members to bring more deposits to LCCU, Canal says, but other than that, it has simply relied on word-of-mouth as its primary marketing tool.
How Do You Compare?
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LCCU uses its high rates and deep trust to attract deposits from socially conscious individual investors and foundations. Other credit unions certified as community development financial institutions (CDFI) can do the same, says Pablo DeFilippi, senior vice president of membership and engagement at the National Federation of Community Development Credit Unions.
DeFilippi says the Federation works with a number of socially responsible investors and advises credit unions to check with his organization or their own investment brokers to explore their connections. Some state pension funds also require a certain amount of such investments, DeFilippi adds.
However, attracting deposits from Latino or any other ethnic community fairly new to these shores comes with its own challenges.
Oftentimes, the first generation market that’s also underbanked might not realize their accounts and funds are protected by the NCUA, or they might not feel they meet the requirements for opening an account, so they don’t approach a credit union, says Miriam De Dios Woodward, president and CEO of Hispanic credit union marketing specialist Coopera.
Woodward says first-generation Hispanic Americans tend to save at home or turn to methods that are traditional to them but not to the U.S. banking environment, such as savings and lending circles. Some fintechs are already facilitating that, including eMoneyPool and Mission Asset Fund.
Meanwhile, as a credit union that succeeds in gathering deposits from an underbanked community, Latino Community is sure to also lend the funds back out. Not all FIs follow abide by that philosophy.
DeFilippi at the Federation points to the case of a branch of now-defunct Manufacturers Hanover Bank that he says at one point had $25 million in deposits from its Manhattan neighborhood but loans of approximately $50,000.
The neighborhood was too poor to lend to but not too poor to take from, DeFilippi says. Lower East Side People’s Federal Credit Union ($56.1M, New York, NY) now serves that neighborhood out of the bank’s branch building.
If you want to develop a relationship with a community, you have to be in that community, lend to that community, and show you trust that community, DeFilippi says.Then you can expect its members to trust you.