How the new year could shake up the credit union industry Posted by AVCU on 8:19 AM

As 2021 kicks off, credit unions can expect uncertainty in keys areas.

The National Credit Union Administration is likely to face a period of transition. Kyle Hauptman recently joined the board and President-elect Joe Biden is expected to make Todd Harper the chairman shortly after his inauguration. All of that could mean a change in dynamics for the regulator.

Other important aspects of the credit union industry, including branches, acquisitions of banks and cybersecurity, could also possibly make news this year.

Evolving dynamics at NCUA

What will the National Credit Union Administration do in 2021?

The agency, normally relatively predictable, has turned out to be one of the biggest question marks for the industry heading into the new year. Much of that comes down to the fact that the chairmanship is expected to shift by the end of this month. Todd Harper, the panel’s only Democrat, is likely to be elevated to chairman once President-elect Joe Biden takes office.

However, Rodney Hood, the current chairman, has one more chance to set the agenda for the agency. The board traditionally meets on the third or fourth Thursday of each month, but Hood has moved the January meeting up by a week to Jan. 14, six days before Biden is set to be inaugurated.

Even if Harper takes the chairmanship, his impact may be limited. His term on the board ends in April, and while most NCUA board members traditionally stay on at the agency until a successor is confirmed, Harper’s plans are currently unclear.

More importantly, though, Harper is politically outgunned. Hood and Vice Chairman Kyle Hauptman are both Republicans, and while either could cross party lines to give Harper a second vote, that’s not widely expected — particularly because one of Harper’s biggest priorities is increasing the agency’s role in consumer protection

“The problem [Harper] is going to have is he’s obviously walking to the chairman’s office with two Republicans down the hall, so it’s going to take some horse-trading, some negotiating…some diplomacy for him to get what he wants,” said Geoff Bacino, a credit union consultant and former board member. “The big danger is obviously that the two Republicans say, ‘I’m not going to second that.’”

The result, he added, is that NCUA could be comparatively quiet in the year ahead.

“On the real nuts and bolts and the hardcore issues that are going to take some work…it could be that everything just slows down," Bacino said.

Continued field-of-membership changes

With the industry’s nearly four-year field-of-membership saga finally settled, more credit unions could begin to make use of those expanded powers in the year to come.

Some credit unions that had intended to broaden their fields of membership in 2020 put those plans on hold once the pandemic hit, but many of those projects have since resumed, said Sam Brownell, founder of the consultancy CU Collaborate.

“Anecdotally, there’s evidence that credit unions prioritized service over expansion” during the early months of the coronavirus outbreak, he said. “I will say that, at least in our experience, that seemed to be a six-month slowdown. Now I think a lot of the people who maybe would have decided to start that project in [spring or summer] delayed it, but what we’re seeing is that many credit unions only delayed it by about six months.”

Brownell added that the field-of-membership changes could be maximized by a new proposal from the agency that loosens some restrictions and would allow federally chartered, multiple-common-bond credit unions to count any ATM and shared branches as a service facilities.

The Federal Credit Union Act requires institutions to operate a service facility reasonably close to members. Under the current rule, that means institutions must have an ownership stake in a branch or ATM for the facility to qualify.

If that rule is approved next year, it could eliminate one of the biggest hurdles to expansion: the capital outlay that comes with building and staffing a new branch.

“You’re going to be able to add every underserved area in the country now, and any federal multiple-common-bond credit union can do that,” he said. “It’s going to make it possible for credit unions to expand their fields of membership more rapidly and more broadly, and allow credit unions to reach the underbanked and increase access for consumers.”

The rule is also especially apt for the COVID era, he added.

“Basically this allows credit unions to open up field of membership and go into underserved areas and do it in a modern way," Brownell said. "The rules before were so focused on branching and the human element being a requirement…but you’re seeing lots of digital fintechs doing a good job serving underserved communities, and field of membership has been an obstacle [for credit unions].”

More bank deals in the works?

One of the biggest questions facing the industry in the new year is whether there will be a return to 2019 levels of credit union-bank purchases. Those deals hit an all-time high that year but slowed substantially in the first half of 2020 before rebounding somewhat as the year came to a close.

Dennis Holthaus, managing director at Skyway Capital Markets in Tampa, Fla., wants to be optimistic about the volume of those transactions normalizing in 2021, but he’s having a hard time getting there.

“With positive COVID-19 tests increasing [and] hospitalizations increasing but potentially being offset by a vaccine somewhere in the near future, it’s really difficult to know,” he said. “My crystal ball is pretty cloudy right now.”

There were seven deals with a credit union acquiring a bank announced in 2020 after 16 such transactions were announced in 2019.

“The pandemic is having significant impacts on both buyers and sellers,” said Holthaus, whose firm has advised several credit unions on bank acquisitions. He added that until there is a widely distributed, effective vaccine, deal talks will continue to move forward slowly.

For buyers, capital ratios have gone down recently, in part because of the significant organic growth the industry has experienced accompanied by lower ROAs due to margin compression.

At the same time, acquirers have had to deal with higher provisioning due to a lot of uncertainty regarding 2020 and 2021 loan performance, both in their own portfolios as well as in potentially-acquired books.

“At this point it’s all about capital management,” Holthaus said.

For sellers, deal valuations have also gone down, which has negatively impacted their motivation to sell, he said.

Holthaus suggested the geography for CU-bank deals in the coming year will be more widespread and won’t be concentrated in a limited number of states. In 2019, Florida was the hotspot for CU-buying-bank deals.

Spotlight on cybersecurity

High-profile data breaches at the end of 2020 could force credit unions to put a focus back on cybersecurity after diverting their attention to the pandemic response.

Kevin Hill, information security manager at the $2.1 billion-asset Orange County’s Credit Union in Santa Ana, Calif., said email phishing schemes are often a financial institution’s weak spot, and many institutions remain at risk heading into 2021.

Most credit unions follow standard security practices such as having a firewall and anti-malware software installed on every system, which make it difficult for attackers to hack their way in through the front door, he said.

But hackers have realized that employees are now the weakest link and have shifted to social engineering efforts — such as phishing — which allow them the ability to hack from the inside out. Typically, an employee inadvertently installs malware that connects to the attacker, giving them access inside the firewall, he said.

“This foothold allows an attacker to search out sensitive data, install ransomware, takeover email accounts or many other nefarious activities,” Hill said.

The average cost of a data breach in the U.S. is almost $8.2 million, which can be the tip of the iceberg, Hill said. Depending on the size of the organization, the additional reputational damage of announcing a data breach can put them out of business, he added.

And having so much of the workforce still operating from home in early 2021 only exacerbates the problem, Hill said. If the proper precautions are not in place, the increase of work-from-home employees extends the perimeter of any organization’s network and potentially the location of sensitive data.

“It’s prudent to take further security measures to avoid a compromise through an employee’s personal devices and to ensure proper configuration on their home wireless networks,” he said. One tactic Orange County's Credit Union utilizes, he noted, are "robust" weekly phishing tests that all employees are required to pass.

Can pot banking make a comeback?

Credit unions and other financial firms faced a setback in late 2019 when Sen. Mike Crapo announced his objection to the SAFE Banking Act, effectively putting any progress for pot banking on hold.

While some had hoped for incremental progress in 2020, the pandemic stepped in and the issue became an afterthought. But as the outbreak recedes, there is hope that the topic could regain attention.

Katrina Skinner, an attorney with Burns Levinson in Colorado and former president and CEO of Safe Harbor Services, noted that FinCEN data shows a decline in the number of banks and credit unions participating in marijuana banking programs during 2020, but she noted that it’s unclear whether those numbers represent a decline in the actual number of institutions participating or merely reflect delays in filing Suspicious Activity Reports due to the pandemic.

Still, she said, regulators and legislators are increasingly comfortable with pot banking.

“We’ve seen more acceptance — not necessarily endorsement…but more acceptance in how examiners at the state and federal level say they want to work with institutions that want to do this,” she said. “It’s not taboo anymore, it’s more of how are you going to do it — not if but how.”

On top of that, Crapo won’t hold the gavel on the Senate Banking Committee in the next Congress, with the chairmanship likely going to Pennsylvania Republican Pat Toomey, who has signaled support for pot banking legislation. That, coupled with a Democratic majority in the House and razor-thin margins for the GOP in the Senate, could help move the issue forward.

It's unclear if the SAFE Banking Act will be revived in the next Congress, said Skinner, but there could still be a path forward. If provisions from that legislation are included in another bill with bipartisan support, that could make it easier for some Senate Republicans to sign on and move the issue across the finish line.

Full legalization, however, probably isn’t in the cards this year, she noted.

“I think you still have enough conservative members who are controlling Congress that are still anti-marijuana, so I don’t think full legalization passes this year,” she said. “They have so many other things to focus on that that’s not going to happen, but I think you will start to see more and more incremental changes.”

Branch forecast unclear

Many credit unions closed branch lobbies or moved to appointment-only service as the pandemic worsened through 2020. But how will the coronavirus impact credit unions’ plans to build branches in 2021?

Glenn Grau, senior vice president of sales for Pittsburgh-based branching consultant PWCampbell, said the pandemic helped teach the industry a few lessons. Foremost among those was that there is a strong need for drive-thru facilities.

“Branches that didn’t have a drive thru had to close completely for an extended period of time, thus impacting customer service in that area,” he said.

But Grau believes there is a lot of pent-up demand moving into 2021 for both new branches and renovations to existing locations to accommodate changes in member behavior.

Branches remain the identity of the credit union for the member, and a physical presence in the community is still critical for growth and gaining market share, he said. But as technology continues to evolve and impact the way members use the branches, routine transactions will further migrate toward digital methods.

As a result, members going to the branch are more often seeking advice, answers to a question or need educated.

“This is forcing branches to continue to change,” Grau said. “The physical footprint is smaller and it contains fewer full-time equivalent employees, but these universal-type employees are capable of handling any of the members’ needs.”

Electronic and digital platforms are not only off-loading routine transactions, but they are finding a way into the branch as a tool to promote products and services, to reduce paper usage and to support branch personnel in assisting in developing a financial plan for members.

The bottom line is that the physical branch will continue to evolve, he said.

“Members will continue to visit branches and they will look different,” he said. “But they will continue to function as the identity of the credit union and the catalyst for growth.”