Win Some, Lose Some. Prediction Time Again.
Every year at this time, this space is reserved for predictions. Last year when I made mine, I must have been in a sour mood for they were downright bleak. Fortunately for credit unions, I was wrong on a few-fortunately for credit unions, I was also right on a few. For some forecasts, it's only a matter of time.
The first prediction I had made at the end of 2009 was that credit union delinquencies would reach 2.5%, up from 1.8%. A combination of credit unions' tightened underwriting and a stabilizing economy proved me wrong. Thank you! According to CUNA data, credit union delinquencies peaked at 1.85% in January and have slowly but steadily declined to 1.70% as of the end of October.
That rate is still high for credit unions historically, but at least it's heading in the right direction. But, if unemployment rates don't improve, this figure could go back up as benefits and savings run out.
I had also said that the number of credit unions would plummet by about 600 over 2010. Was I wrong or just fighting unnatural market forces? In January 2010 there were 7,814 credit unions according to CUNA; by October, 7,647 were still in existence, a decline of 167.
But take a glance through credit union financials and see how many you can find that you can't figure out how they're still operating. Dozens of credit unions are only functioning by the grace of the NCUA or other regulators' forbearance. The NCUA in particular has had the corporate regulation and legacy assets plan to straighten out this year, as well as conserving five corporates.
Over the next 12 to 18 months, the corporate credit unions will grab a few headlines as they sort themselves out. I predicted they'd shrink to six by now; give it another year.
State regulators are facing significant budget cuts, which the NCUA as insurer of most of those credit unions has an interest in. In its budget for 2011, the NCUA added 60 new field staff, and the total budget increase came to 12%. The 2010 budget also included a 12% increase. The agency's 2012 budget will increase but not nearly as much. That's my prediction.
(Another 2011 NCUA prediction: Geoff Bacino will return to the NCUA board filling Board Member Gigi Hyland's seat when her term ends. Debbie Matz will remain chairman.)
The staff labor union is taking its toll on the NCUA budget, as will the resources to oversee the merger, closing and liquidation of an increased percentage of credit unions next year. Mergers aren't a bad thing if there is solid business reasoning behind it. I don't believe 167 mergers, voluntary and otherwise, were nearly as many as should have occurred in 2010. In 2011, there will be an increased number of NCUA-assisted mergers of failing credit unions. The number of CAMEL 4 and 5 credit unions continues to grow, and the NCUA will have to take action at some point, as it and the state regulator did with Beehive. (See article, page 1). A positive sign is that the percentage of insured shares represented in those credit unions has been on a downward trend over 2010. But, it's still extraordinarily high at 5.2% compared to just above 1.0% in 2005-2007 prior to the financial crisis taking its toll. Credit unions digging out, merging themselves out, or regulator closures will continue bring that figure down through 2011.
Credit unions that aren't in trouble with their regulators will be looking around at options, too. In the blog post "Credit Union Value Is Not in Assets," I responded to a blog post by First Entertainment CU CEO Charles Bruen who suggested shutting down all credit unions under $1 million in assets. I wrote that value to the members was more important than size.
The debate continued on at The Financial Brand where Jeffry Pilcher looked at a number of statistics relevant to size. What he found: 78 credit unions this summer served fewer than 100 members and 15 credit unions had just one member. Forty credit unions have less than $10,000 in assets. While I don't take back my words that size isn't the be-all-end-all, I wasn't aware such absurdity existed. These discussions are important to have regardless of the side you take.
On the flip side, credit unions that advocate certain asset-size credit unions are too small to exist should commit to taking over these accounts and truly serving the needs of these members. These credit union members should not be left out in the cold. Credit unions exist in part to provide financial services to those who aren't served elsewhere. However, those members also deserve to be served by a credit union that can offer them all the services they need throughout their financial lives.
And just as smaller size doesn't determine better service provided, larger credit unions aren't necessarily out of touch with their mission to serve their members. The NAFCU 2010 Report on Credit Unions presented to the Federal Reserve Board cited HMDA data showing that credit unions (74.5%) approve more mortgage applications in underserved areas than banks (68.6%) or thrifts (65.8%). Of those approved, credit unions also made fewer that were considered to be at a high interest rate. These statistics are a positive comparison with for-profit financials, but it also may indicate that credit unions could make more loans in underserved areas if they priced better for risk. And, given that only financial institutions over $39 million in assets have to report HMDA data, the figures could be even better as low-income credit unions tend to be smaller. This data is one of many reasons credit unions earn their tax exemption and will maintain it in 2011.
Wise credit unions will also have explored the possibility of converting to a bank. It just makes strategic sense to have this back-pocket kind of plan should things go south for the credit union charter. We'll start to see conversion attempts again in 2011 by a handful of credit unions over $500 million in assets and some smaller ones. One saving grace in the longer term could come with significant capital reforms for credit unions, which will take place in the 112th Congress but not necessarily in 2011.