Conservative Business Decisions Keep Bluegrass Credit Unions in the Green
Kentucky credit unions’ key financial indicators are positive, yet conservative. And, that’s just how they like it in the Bluegrass State.
“Kentucky is a fairly conservative state, so we don’t typically get the real high highs or the low lows you see in most economic cycles and that’s kind of the case here,” said Kentucky Credit Union League President Wendell Lyons, speaking about Kentucky’s statewide average of 0.80% delinquency.
“Probably another factor is the underwriting here tends to be more conservative. For example, the hot topic of the day is member business lending, and in Kentucky, of our 84 credit unions, only 21 make member business loans, and of those, they only have 3% of assets in MBL. So, we tend to be a little more traditional here in the mix of loans,” he said.
Conservative underwriting is credited for a 0.75% delinquency rate and 0.60% charge off rate, both as of June 30, at the $924 million Commonwealth Credit Union, according to Comptroller Donna Jackson.
She also said her conservative field of membership – state employees who participate in Kentucky’s retirement system – also tend to have more job stability than the average Kentuckian. The state hasn’t suffered any state employee layoffs like in other areas, she said, and Kentucky’s unemployment rate matches the national average of 8.2%.
Commonwealth, based in the state capitol of Frankfort, tightened up its underwriting in 2008 when the financial crisis hit, but recently relaxed underwriting because losses were so low, Jackson said.
“We felt maybe we had tightened too much, so we (loosened underwriting) about a year ago. We tried to follow the lead of what we were hearing in the marketplace, and that seemed to work for us this time,” she said.
Fewer losses have helped boost Kentucky credit unions’ average return on average assets to 97 basis points during 1st quarter 2012.
The $60 million Greater Kentucky Credit Union has been very profitable this year, reporting 1.75% ROAA as of June 30, according to President/CEO Mike Fromma. He credited Greater Kentucky’s lack of losses, saying “when you’re not funding your allowance account, that ROA will look pretty good.”
The Lexington-based Greater Kentucky also earns good interest income, Fromma said, with an 80% loan to share ratio.
“Interest income is the lion’s share of revenue,” he said, “but there’s a huge drag on it with rates where they are. There really isn’t much spread to speak of, and it barely covers our operations costs.”
Lyons stressed that Kentucky’s nearly 100 basis point ROAA is a mathematical average, and could paint the impression that profitability is higher than reality because the state’s large credit unions are performing well.
“I think probably also an important figure is the 74% of credit unions with positive ROAA, which is right on the national average,” he said. “When you look at the larger credit unions, Fort Knox for example, which has $1.1 billion in assets and very strong ROAA. That begins to pull the average up for everybody. We still have 26% who are struggling with earnings.”
Struggling credit unions tend to be smaller, Lyons said, although Kentucky has plenty of relatively small credit unions like Greater Kentucky that are doing well.
“It depends upon the sponsor group,” Lyons said. Kentucky is home to health insurance company Humana, four automotive plants, UPS’ worldwide air hub, and the bourbon and horse racing industries.
Like in other states, Kentucky credit unions are struggling to grow their loan portfolios, with a 12-month state average of 2.6%.
“They’re looking for loans wherever they can get them,” Lyons said. “There has been some growth in indirect auto loans, which has been a struggle, but it’s positive.”
Greater Kentucky has had robust loan growth so far this year, with Fromma reporting a 9.34% gain as of June 30.
“Through ’08 and ’09 we had a drag going and actually had negative growth, but in 2012 and most of ’12 we’ve seen good growth,” he said. “A lot of it is fueled by consumer loans: cars, personal loans, those types of things.”
The community charter credit union hasn’t had problems making mortgage loans, either. Fromma said he tries to hold his long-term assets to 20% of assets, allowing it to go as high as 30%.
“We’ve had a lot of bleeding off of variable rate mortgages in the last three to four years,” he said. “People don’t want those anymore, even though the rates are so low.”
Loan growth has been less robust at Commonwealth. Numbers are pretty flat, at a little under 1% year-to-date, Jackson said.
“We generally have a harder time in the first half of the year, because our field of membership uses their tax returns to pay off their Holiday loans,” she said. “We are estimating 3% growth this year, mainly in the consumer market, which are smaller loans so it takes a lot of them to grow. But, we have people who need new cars, credit cards, that sort of thing, so we will have some loan growth and will manage share growth in that range, too.”
Jackson said managing deposit growth has been key in maintaining positive ROAA.
“When we see loans aren’t growing, we kick back our savings rates to keep growth down,” she said. “We do want to pay our membership the best rate we possibly can, but we also want to be there for them when they have borrowing needs. We believe maintaining that balance is the right thing to do overall for our membership.”