BY LORRIE WOHFEIL
Take a minute to ponder the title of this month’s article. You are most likely wondering why you need to know the average FICO score in the community in which your credit union resides. If you are like most, you have an awareness of the average FICO scores and trends at your credit union. We are hopeful you are also averaging your net yield (gross yield after charge-offs) by product and paper grade. But why is the community important? The vast majority of credit unions today tend to simulate their community. Whether the charter allows for community eligibility or the SEG employees reside in your community, chances are your credit union is in fact very much a neighborhood establishment. Your credit union’s average FICO scores should reflect your community FICO score. If not, you may find your image in the community suggests it’s too tough to get a loan. This can hamper your yield efforts right out the gate.
If you have been following our articles, you understand we believe strong net income is critical for credit unions. This doesn’t take a rocket scientist to figure out. We also believe a strong loan yield, particularly your net yield, is the critical component. In fact, even in times where rates are low and margins are squeezed, a 6.5% net yield is possible. As prefaced above, the need to track net yield is tremendous. Your findings will prove, if they haven’t already, two key things:
- Lower FICO scores result in higher yields generated
- Unsecured loans, at any credit tier, will produce the greatest yields
What often tends to happen is that credit unions hide behind the “type of member they have” as a means to why they can’t achieve a strong yield. This is often ill warranted rationale.
- “My members have high FICO scores because of the community or SEG relationship.”
- “My members are wealthy.”
- “My members don’t need loans.”
- “My members will only borrow from me if I have the best rate in town.”
Credit unions’ best rates are usually within 50 basis points of their investment yields. Investments don’t incur much of any expense and are polar opposites of the expenses it takes to loan money out. Therefore, we all have to get good at putting loans on the books with a larger spread over investments to build net income.