As 2017 comes to a close, S&P Global Market Intelligence looks at some of the issues sure to garner attention in the credit union space next year.
WILL CREDIT UNIONS CONTINUE BUYING BANKS?
When North Augusta, S.C.-based SRP FCU agreed to acquire Southern Bank in late November, it marked the sixth deal announced this year in which a credit union was acquiring a bank. There were four such deals announced in 2016 and three in 2015.
Peter Duffy, managing director at Sandler O'Neill & Partners, said credit union acquisitions of banks will continue in 2018 and will likely fall within or beyond the volume seen in recent years with five to 10 deals and maybe more. The sellers will be smaller banks with assets of about $85 million and that are averaging zero to 10 basis points of ROA, he said. "These banks make for a nice acquisition for credit unions who are adding geography and customers with established branches, though due diligence is important as the average nonperforming assets of the acquired banks so far is 3+%," he said. The acquisitions are likely to remain small because credit unions can only offer cash for the purchase of a bank while banks can and do offer stock and cash. Stock is part or all of the currency in more than 75% of bank transactions over the past few years, Duffy said.
HOW MUCH WILL CREDIT UNIONS RECEIVE IN STABILIZATION FUND REBATES?
The National Credit Union Administration on Sept. 28 voted to close the temporary corporate credit union stabilization fund and said it will likely result in an initial rebate of between $600 million and $800 million being returned to credit unions starting in 2018.
Idaho Central CU President and CEO Kent Oram said the Chubbuck, Idaho-based credit union does not yet have a feel for the specific amount it might receive. "But even if I did have a good feel, even an exact feel, I would not budget it in for 2018 simply due to the unknown timing," he said. Oram said the NCUA did the right thing in closing the stabilization fund but added that his preference would have been for the agency to return as much as possible up front and then — if the insurance fund needs bolstering — ask for that amount to be returned. "It is really the same thing in the end, but it feels more transparent to me to do two transactions," he said. Oram predicted that 2018 will bring charges to the insurance fund through taxi medallion losses. "I hope that doesn't become too onerous," he said.
WILL AUTO LENDING DIP?
Auto makes up a large portion of credit unions' lending portfolios, and those loans continue to grow. But new auto sales continue to slow nationwide, and that could be reflected in declining growth rates on lenders' balance sheets in 2018.
Cooperative Credit Union Association President Paul Gentile said since the 2008 economic downturn, auto sales have skyrocketed, but many of the group's credit unions believe the pace of new auto loans will subside next year. "We're already seeing a leveling off of auto sales and that will translate to a leveling off in credit union auto loans, but it will still be a strong year," he said. One trend credit unions are watching is the duration of auto loans continuing to lengthen. Seven-year car loans are now commonplace with nearly 30% of originations being greater than six years, Gentile said. Cars are more expensive, so credit unions and others are providing longer terms to keep payments low. "Is it a concern? Most auto loans still turnover a lot earlier than their term so it's not been a challenge, but we're watching it," he said.
HOW WILL RISING INTEREST RATES IMPACT CREDIT UNIONS?
The Federal Reserve in December raised the federal funds rates for a third time in 2017, this time to a target range of 1.25% to 1.5%. But some analysts say the economic outlook for 2018 is unclear as is how the Fed will react in the coming 12 months.
Curt Long, chief economist and vice president of research for the National Association of Federally-Insured Credit Unions, said NAFCU anticipates three rate hikes in 2018. He said there is some positive momentum to economic growth, and tax reform may provide a further boost in the near term. But it remains to be seen how much of a fly in the ointment inflation will be. Fed officials have begun to show their doubts that weak inflation truly is due to transitory factors, Long said. But that skepticism did not prevent them from three rate hikes in 2017, and until proven otherwise, NAFCU believes the committee will continue to respond to a strong overall economy with further tightening next year despite weak inflation.
The rate environment continues to be a challenging one for credit unions, Long said. Margins continue to narrow, and many credit unions are going to be feeling an even tighter pinch in 2018. Borrowing conditions are still favorable, so NAFCU expects loan growth to remain strong. "More recently, we have seen increased share growth as short-term rates have risen," he said. "That trend should accelerate as Fed tightening continues next year."
WHAT REGULATORY CHANGES ARE ON THE WAY?
There are a number of public policy matters that will be important to credit unions in 2018, including leadership changes at both the Consumer Financial Protection Bureau and the NCUA.
Ryan Donovan, chief advocacy officer for the Credit Union National Association, said CUNA has articulated a vision for the CFPB that includes fixing problematic rules, stopping the stream of new rules, transferring supervisory authority of the very large credit unions to the NCUA, retaining the Credit Union Advisory Council and using the exemption authority to tailor any new rules to the abusers of consumers.
Additionally, CUNA will continue to engage the NCUA on examination modernization, call report modernization and supplemental capital. In Congress, it will continue to support the enactment of regulatory relief legislation that improves the operating environment for credit unions. "And we'll continue to aggressively pursue entities that put consumer data in jeopardy, making sure that they pay the price for their negligence and improve their systems to prevent future breaches," he said.
