ATLANTA-Credit quality issues that continue to erode capital at underperforming institutions will significantly quicken the pace of credit union mergers in 2009, predicts one strategic planner who views the trend as an opportunity for well-performing CUs to increase size and services at a time when banks are retreating.
Gee Gee Kaufman, director of strategic planning for the Lombard, Ill.-based Raddon Financial Group, suggested that "It will be opportunistic this year to look at mergers or acquisitions. If the decision of the board and management is that the credit union cannot compete because of inadequate capital and lack of profitability, and can't make adjustments in technology, products, or services to correct the issues, more will be looking to other credit unions for help."
Seeking Out Partners
Credit unions with higher capital levels should be seeking potential partners to either increase the franchise within their footprint or penetrate new markets, Kaufman suggested.
"One approach is looking for a merger of equals, someone with similar capital levels and reasonable levels of profitability," Kaufman said. "The other approach is predatory-looking for institutions that are troubled, with lower capital levels and members who are not as happy as they should be. It's an opportunity to provide those members with a benefit because your institution is bigger and stronger, and offers greater diversity in locations, products, and services."
If a credit union is struggling with net income due to shrinking margins from falling mortgage rates, Kaufman reminded that asset liability committees are going to have to be "stricter in their decisions. The thinking that my hair is on fire and we need CDs at 3.5% has gone by the wayside. One does not compete just to be competitive. You have to be strict and disciplined in how much you are going to pay in interest rates to attract and maintain deposits to support lending."
Kaufman sized up the situation facing many credit unions by looking at figures for 475 CUs he works with. Third quarter 2007 statistics showed that return on average assets was 76 basis points, compared with 35 basis points for the same period in 2008. Non-performing loans as a percentage of total loans was 75 basis points in the third quarter of 2007, and increased to 1.02% for the same period the following year.
'A Tremendous Strain'
"It's a situation where expenses continue to increase, non-interest income is flat or down, and the number of non-performing loans continues to grow, creating a tremendous strain on earnings and net worth," Kaufman said.
To address the situation, Kaufman recommends redeploying funds into higher-yielding assets and refocusing away from business lines that have cost credit unions in charge-offs and delinquencies. Depending on the local market conditions, Kaufman recommended that most CUs should place a greater emphasis on mortgage lending and less on auto loans and home equity.
"In the last few credit union strategic planning exercises I've been part of, it's been the focus on indirect auto lending as a principal asset within the balance sheet that has been the issue."
For info: www.raddon.com.
CU Journal subscribers can read an in-depth interview with NCUA Board Member Gigi Hyland on the issue of supplemental capital and its prospects by going to www.cujournal.com and entering "secondary capital" into the search field.
