Michigan reports weakening financial conditions at state credit unions

CU Times Midwest Correspondent LANSING, Mich. – Michigan credit unions have received a gloomy report card from the state’s regulator, showing the weakest financial condition in nearly a decade. The commissioner of the state’ Office of Financial and Insurance Services, however, was optimistic about long-term soundness. The letter dated Aug. 8 to credit unions and based on mid-year call reports, cited “rapid asset growth, high loan delinquency and charge-offs, low or negative earnings, and declining net worth ratios.” In an interview with Credit Union Times, OFIS Commissioner Frank M. Fitzgerald said, “Clearly, the indicators are somewhat weaker in the aggregate than they have shown for the last half decade to a decade.” But Fitzgerald does not believe this shows a “systemic problem with the Michigan credit unions.” He noted that 82% of the state’s credit unions and 90% of credit union assets retain a 1 or 2 CAMEL rating. “So the vast majority of our institutions and our assets are at a nice 1 or 2 comparative CAMEL,” he said. “On the whole, I don’t think that this letter should be interpreted as a negative or that the state of credit unions in Michigan is weak . we’re still in sound shape,” Fitzgerald said. While noting that Michigan’s results tend to be weaker than the national averages, CUNA economist Mike Schenk agreed with Fitzgerald about the long-term prognosis. He said higher earnings at the very largest credit unions pull up the national numbers. Michigan numbers, he said, likely reflect results from a larger number of small credit unions, which tend to be more sensitive to short-term swings. Smaller credit unions, however, tend to be managed conservatively “have relatively high levels of capital and can weather these short-term challenges.” The disappointing numbers Fitzgerald and Schenk agreed, stem from the declining economy and, in particular, the rapid influx of savings into credit unions since the stock market collapse. The OFIS letter says assets at Michigan’s state-chartered credit unions grew at a 15.5% annualized rate at June 30, 2002, compared with a national rate of 15%, according to Schenk. That state rate is down from 17.0% at mid-year 2001. As a result, earnings have plummeted. The annualized aggregate return on assets for Michigan credit unions at June 2002 was 0.78%, the lowest in 14 years. That is 26 basis points below the national average computed by Schenk, 1.04%. The national ratio, he said, has risen in the last year, from 0.96%. At the same time, the number of Michigan’s 280 state-chartered credit unions reporting year-to-date losses more than doubled to 38. Consequently, the aggregate net worth ratio of Michigan SCCUs fell to levels not seen since 1995, to 11.06%. Despite this decline, that compares favorably to the national ratio of 10.58%. The Michigan letter said that delinquency levels remained stable while charge-offs “became more of a problem.” The letter did not, however, report specific ratios for delinquent loans to total loans or for net charge-offs to average loans. Instead, it said that net charge-offs at 25 credit unions increased more than 100 basis points compared to 13 reporting a similar increase in June 2001. Twenty-two credit unions, double the number from June 2001, recorded a net charge-off ratio of over 1.5%. Fitzgerald’s office could not provide delinquency figures at press time. Schenk said smaller credit unions tend to have higher delinquency rates than average, but lower charge-offs. They tend to be closer to individual members, less inclined to devote time to collections and more willing to carry slow payers. Fitzgerald said that a higher proportion of state-chartered banks have been put on the equivalent of a 3 or higher CAMEL rating than credit unions. The likeliest outcome, Fitzgerald said, was that the consolidation of credit unions will continue, perhaps at a faster pace. “Clearly that is a tool and one of the very good tools a regulator can use,” he said. David Adams, president of the Michigan Credit Union League, also expects mergers to continue if earnings falter. “But in most cases these are credit unions that are well capitalized that are losing money in the current period,” he said. Adams agreed, however, that credit unions in his state have hit a bump in the road. “We’re concerned that credit unions’ bottom lines are being squeezed further,” he said. “We’re seeing an up tick in the credit unions that are having operating losses and narrowing margins.” Nevertheless, Adams believes that most of his state’s credit unions are well capitalized and “can handle a couple years of losses.” He believes management discipline in the industry is greater than it has ever been and that regulators are quick to step in when situations deteriorate. -