🔒CT credit unions’ prospects brighten despite rate, state fiscal pressures

Prospects for many credit unions have improved and should continue to do so in 2017, even if interest rates rise at modest levels during the year. The year 2015 ended with, and 2016 is tracking toward, positive member growth for Connecticut credit unions, after five-plus years of sideways movement. Through the second quarter of 2016, over two-thirds of the 107 credit unions in Connecticut have grown assets, a significant improvement from the past few years. Currently, three out of four credit unions have positive return on assets, a 50 percent improvement over 2013.

At American Eagle Financial, 2016 was a good year. We experienced double-digit net loan growth fueled by consumer home and auto purchases and refinancing.

Auto sales financing for all credit unions has been a growing part of the industry since the large banks retrenched during the financial crisis. Credit unions across the country are front and center in auto financing, and with new auto sales at near record highs the last few years, business has been good and loan quality is strong.

The election

Credit unions have similar regulatory and compliance burdens to banks of equal size. The recent election results may suggest some moderation in the implementation of so much new regulation, like for example the rules implemented with Dodd-Frank. Actual results will vary from campaign promises.

Overturning large pieces of legislation or making wholesale changes at various regulatory agencies and authorities takes a lot of effort and cooperation.

President-elect Trump clearly has numbers on his side as he begins his administration, and he has telegraphed a message of less regulation in certain areas of financial services, but also supports bringing back some practices that could impact larger institutions.

The economic environment

American Eagle is expecting two rate increases in the next year or so. The low-rate environment will prevail for some time though, as GDP and other indicators are not yet demonstrating robust growth.

National employment numbers continue to be published and adjusted so much that market makers have priced in rate increases long before they are actually implemented. Historically low rates and the availability of credit are helping many Connecticut residents to lower their borrowing costs and consolidate loans.

Standard and Poor's provided a negative outlook for Connecticut, saying the state's budget and unfunded pension liabilities make the state's economic future look uncertain. There are no easy answers for this gap to be closed, and debt service is already a hefty portion of our annual budget. This will act as a headwind for any company contemplating Connecticut to domicile their business, with or without incentives, as the tax structure is still non-competitive even with some other New England states.

Connecticut is lagging all other New England states in job recovery since the financial crisis and the state economy shows little signs of growth. This is putting pressure on the state's finances as tax receipts fail to deliver against spending levels. While there is evidence of a few larger employers staying put, there is still clearly more outmigration of manufacturing jobs to other states.

Connecticut is almost 30,000 jobs away from pre-recession employment levels. Jobs impact consumers' ability to buy things and obtain credit, which is central to the business focus of local financial institutions like credit unions. Many smaller credit unions rely upon a handful of businesses and their employees and family members to provide a source of credit and thrift for their organizations, and fewer employees mean lower lending.

Local population, consumer trends

Census data has shown that Connecticut residents are moving to New York and Massachusetts in large numbers. While they are not low-cost places to live, the vibrancy of their key cities and the economic tailwinds make them attractive markets, especially for younger workers.

The population continues to have dissatisfaction with high taxes, the real estate market, and the climate.  Fewer jobs equals fewer prospects/people, all this occurring while new forms of competition emerge. The Connecticut consumer is tentative at best, and consumer sentiment is somber.

Dean Marchessault is CEO of American Eagle Financial Credit Union.