Insights into 2013 – Regulations, Rates, and Recovery Dampen CEO Optimism at Credit Unions

By Brad Smith, Abound Resources – a CUNA Strategic Services alliance provider

Each year we survey credit union CEOs about their outlook for the coming year. CEOs started 2012 with optimism but the mood has turned more pessimistic. Three main areas are causing the grief—the three Rs if you will: regulations, rates, and recovery.

In past years we have been encouraged by credit union CEO optimism in spite of a challenging economy and increased regulatory burden. This year CEOs are more pessimistic. One-quarter (25%) of credit union CEOs report they are either very or somewhat pessimistic about their credit union’s outlook for 2013. In 2012, only 16% were very or somewhat pessimistic. Only about one-third (37%) are optimistic or very optimistic about 2013, compared to 43% in 2012. The remainder (38%) expects another year like 2012.

CEOs are clearly frustrated with the cost and hassle of regulations coming out of Washington and are fearful of future developments from the CFPB. The sluggish economic recovery also weighs heavily on the minds of CEOs, but, as credit union consultants, it’s the regulatory burden and the fear of the unknown that is keeping our clients up at night.

Perhaps if the economic recovery had been more robust, CEOs would be more optimistic. But combine weak loan demand and a flat interest rate environment with regulatory uncertainty, and it’s no wonder that CEOs are less optimistic than in the past.

It’s All About the Regulations

Once again, the issues that credit union CEOs have no control over (regulations, economic recovery, interest rates) are the ones of most concern. Regulations have always been a concern, but the concern is creeping upward. In 2012, regulatory concerns (53%) were dwarfed by concern about the weak economy and loan demand (70%). This year, the regulatory burden was the number one concern, cited by 65% of credit union CEOs. The weak economy/loan demand still figures prominently at 63%, but it’s clear that CEOs are very, very worried about regulations.

New Focus on Mortgage and Commercial Loans

Growth priorities for 2013 are all about increasing lending and fee income, with growing consumer loans the overwhelming number one priority cited by almost every (88%) CEO.

But mortgage and commercial lending will be more important in 2013 according to survey participants. This year, 35% of CEOs identify mortgages as a priority compared to 23% in 2012. With the Federal Reserve’s vow to keep short-term interest rates unchanged through 2015, the market opportunities for mortgage lending remain positive. That said, upcoming regulations and/or additional capital requirements could squash many credit unions’ mortgage initiatives. There is still some risk in putting all of your lending eggs in the mortgage basket.

Interest in growing member business loans increased dramatically from 13% in 2012 to 33% in 2013. Credit unions are clearly looking to diversify their loan portfolios by adding commercial and mortgage to the mix.

Improving market share in the small business market is a continued low priority for credit union CEOs. We feel this is a missed opportunity as that market segment is very open to a credit union’s value proposition due to the poor service and high fees of the Big Banks. Small businesses also are quite profitable as they typically bring all of their personal business over to your credit union when they move their business accounts.

Workflow Top of Mind

2013 is the year of workflow. In 2012, streamlining workflows was second in priority to improving efficiency ratios and becoming more efficient. This year, workflow is the number one efficiency and cost savings priority for CEOs (50%), followed closely by improving efficiency ratios (47%). There is a built-up demand for improving workflow since so few credit unions made workflow improvements last year.

As credit unions streamline workflows, the best practice is to also “bake in” compliance and risk management so that new processes deliver member service, cost, and risk management improvements. This “baking in” will be key to cost-effectively managing growing regulatory challenges in 2013.

Regulatory Concerns Explode

Given the current regulatory climate, it is no surprise that addressing regulatory compliance requirements is CEOs’ number one financial and risk management priority. But regulatory compliance dwarfs any of the other important financial and risk management tasks that CEOs need to deal with by a margin of almost two to one.

Given the hits many credit unions took on capital in 2011 and 2012, it is no surprise that a third (33%) of credit unions cited improving capital as a key priority for 2013. Until Washington allows credit unions to have more access to capital, improving earnings remains the primary capital improvement strategy for most.

Replacing NSF/OD income continues to increase in importance. In 2012, 17% of CEOs considered it a priority versus 24% in 2013. However, we would argue that there is still a need for dramatically improving non-interest income in most credit unions.

Lowering cost of funds by growing business deposits is still far down on the list but its importance has more than doubled from only 3% in 2012 to 7% in 2013. In an environment in which interest rates are stuck at nearly zero for the foreseeable future, loan yields are stuck as well and lowering cost of funds remains an important strategy to improve profitability.

The biggest surprise of this year’s survey was how much interest in enterprise risk management (ERM) increased. Establishing an ERM function didn’t appear in our list of CEO priorities in our 2012 report; this year it’s number seven. Even though regulators have been “encouraging” credit unions even below $1 billion to bulk up risk management practices, this jump in importance surprised us.

Relying on Technology to Improve Member Services and Efficiency

Using technology for better member services edged out doing more with existing technology for the first time. To support a renewed focus on member services and competitive differentiation, credit union CEOs are ready to invest in new systems and expanded online and mobile capabilities. The hottest credit union technology trend? Mobile remote deposit capture.

Credit union CEOs are wise to focus on competitive differentiation but should also continue to focus on getting more value from existing technologies and vendor relationships. There are efficiencies and cost savings to be harvested from technology the credit union already owns, and part of a vendor management program should include performance management to maximize existing relationships. A credit union’s vendors may have improvement suggestions since they have insight into practices across many credit unions and can often suggest tactics for getting the most value out of their products.

To download the full survey results and a white paper on recommended strategies for 2013, click here.

Brad Smith

Brad Smith

Brad Smith has over 20 years’ experience helping financial institutions achieve their business goals by integrating strategy with sales, marketing, operations, and technology best practices. Brad is an advisor to ... Web: Details