Improving Conditions Lead to 'Strong' Prognosis For Credit Unions
Opinions sometimes differed, but experts told Credit Union Times they agreed that despite continuing challenges posed by regulators and the economy, America’s credit union movement has an excellent prognosis.
“From the data we are seeing, the financial health of credit unions is quite strong,” said Dennis Dollar, principal partner for Dollar Associates LLC in Birmingham, Ala. “It’s not without challenges going forward, but we’re in a strong position at the halfway point of 2013.”
Dollar pointed to increases in lending and non-interest income revenue, both of which have improved over the past few years. Loan growth improved during the past nine consecutive quarters, with increases over last year of 5.6% in first mortgages, 10.7% in new auto loans, 9.3% in used auto loans and 8.3% in member business lending, according to NCUA call reports and other sources.
Add in a delinquency rate of just 1% and charge-offs at 58 bps, and credit unions’ futures look bright, he said.
“When you combine the improving lending numbers with over 4 million new checking accounts over the past two-and-half years and recognize that checking accounts are the primary driver of non-interest income, the revenue picture is definitely improving,” Dollar added.
In addition to a strengthening economy, the positive numbers can be credited at least in part to effective management, according to consultant Adam Denbo. Despite mergers, liquidations and acquisitions, the movement is much stronger than in years past, he said, adding that an improving economy and renewed credit union investment in technology, especially mobile delivery channels is also contributing to greater financial health.
“We are seeing net worth increase, higher ROAs and loan-to-share ratios are starting to increase,” said Denbo, partner and managing consultant with Samaha & Associates Inc., the Chino Hills, Calif., firm that recently acquired Shapiro Partners, Denbo’s former employer.
“For the first time in years, credit unions are starting to have net loan growth stronger than shares,” Denbo said. “Higher operating expenses with stronger ROAs are signals that credit union senior management is encouraged to invest in infrastructure, be it people and/or technology resources.”
However, the second-quarter 2013 glow is a little less rosy than first quarter, according to consultant Tom Glatt, Jr. His Wilmington, N.C.-based firm uses its own analysis to produce a quarterly Credit Union Industry HealthScore, which indicated that during the second quarter credit unions may have suffered from a few seasonal sniffles.
Quarter-to-quarter comparisons show a decline for the second quarter in the overall industry score, the HealthScore reported. The decline was driven by lower efficiency scores, operating expense, delinquency, asset growth and membership growth. On a positive note, scores for net worth, return on average assets, charge-offs, deposit relationships and loan relationships improved.
The report also noted that many of the changes quarter-to-quarter, both positive and negative, were driven by common seasonal influences impacting asset and membership growth.
Improving conditions mean an increase in business, which also will lead to increased competition, requiring credit unions to be vigilant in the way members are being approached in the marketplace. Complying with increasing regulations will increase costs and create challenges. In fact, regulatory compliance may well be the greatest challenge facing credit unions, consultants said.
“Regulation is the biggest question mark for credit unions looking at the improving revenue picture and wondering what could come along to kill the goose that›s laying a fairly golden egg for credit unions today,” Dollar said.
He pointed to pending NCUA regs on CUSOs and risk-based capital, the Consumer Financial Protection Bureau’s seeming obsession with overdraft fees and the recent court ruling on the Federal Reserve’s bifurcated debit fee rule as areas of concern.
“All of these are regulatory question marks that make even the most strategic-minded CEOs and board members lay awake at night," Dollar said.
Despite regulatory burdens and competitive threats, the movement will remain strong provided it continues to compete effectively and implement the technology solutions that now drive the financial services industry, Denbo said. In addition to more effective performance by credit unions themselves, industry trade associations at both the local and national levels need to change if necessary to meet their member institutions’ changing needs, he added.
However, the shifting sands of the regulatory environment seem to pose the greatest challenges, Dollar said.
“(Credit unions) should endeavor to influence regulatory actions as aggressively as they can, but the biggest mistake they could make would be to become stationary in a marketplace that requires ongoing investment in products, services, marketing, technology, branching and growth-oriented planning,” he said.
The right technology is also needed to improve internal efficiencies and provide members with access to funds through multiple delivery channels, Denbo added.