Dec. 10, 2013 |
Solid loan growth and continued low interest rates have helped the nation’s 6,600 credit unions rebuild from the 2008-2009 financial crisis, according to new data from the National Credit Union Administration (NCUA).
But there might be storm clouds on the horizon. NCUA Chair Debbie Matz warned recently that the prospect of higher interest rates could cut into credit union profits.
Inside credit union circles there also is concern for the long-term health of small credit unions, which make up the majority of the industry.
Credit unions, which are cooperatively owned, account for a fraction of the nation’s financial holdings. As a group, the 6,620 federally insured credit unions held a little more than $1 trillion in assets at the end of September, compared with more than $14.4 trillion for the nation’s 6,900 banks. There are four banks that each have more assets than all credit unions combined.
"Nationally, credit unions are finally coming out of the recession. But we still have pockets that still are struggling.”
California and Nevada credit union leagues
It probably is fair to say that, as a group, credit unions were affected less than commercial banks by the fallout from the collapse of the housing market in 2007 and 2008. In large measure that is because, collectively, they were less exposed to the mortgage market and made relatively fewer loans to home builders and developers.
Lending did not fall as sharply at credit unions as it did for banks, and credit union loan growth has outpaced bank loan growth in recent years.
Still, the recession and stubbornly slow recovery in the overall economy took their toll and continue to create choppy waters for some institutions.
“Nationally, credit unions are finally coming out of the recession,” says Diana Dykstra, president of the California and Nevada Credit Union Leagues. “But we still have pockets that still are struggling.” Dykstra noted that according to the latest data, 28 percent of credit unions lost money in the third quarter. “It is a really lumpy recovery,” she said.
The real estate collapse was particularly devastating in the states Dykstra’s group serves. “Homeowners are still not in a good place. Nevada home prices are still down 41 percent from the peak. In Las Vegas, 48 percent of households have negative equity,” she says.
Credit unions took a collective hit from the housing crisis when a handful of so-called “corporate credit unions” collapsed under the weight of their investments in low-quality mortgage backed bonds. See our previous coverage here .
In 2010, it was estimated that fixing the problem could cost as much as $16.1 billion. Now the upper end of the estimate is $12.1 billion.
The losses have turned out to be smaller than projected in 2010, partly because regulators have been able to collect more than $1.75 billion from the banks and other financial institutions that issued the mortgage-backed securities to the corporate credit unions, and in part because the housing recovery helped bolster the value of the mortgage-backed bonds.
So far the National Credit Union Administration has assessed credit unions $4.8 billion to cover the corporate losses. In addition, NCUA is, in effect, writing off $5.6 billion in capital investments that retail credit unions had made in the corporates. That means credit unions have contributed $10.4 billion to fix the corporate credit union problem.
In November, the NCUA said it expects to need between another as much as $1.6 billion to finish cleaning up the mess. But it also held out the prospect that it has collected $200 million more than it might eventually need. After taking $700 million from credit unions this year, NCUA has said it doesn’t expect an assessment in 2014. It has until 2021 to complete the resolution.
Because they are cash expenses, the assessments reduce credit union profits.
Carrie Hunt, senior vice president of the National Association of Federal Credit Unions, says, “As long as the economy continues to improve, it is unlikely that more (assessments) will be needed,” to finance the corporate cleanup. That, along with continued loan growth, should bolster credit union profits, she says.
To help finance the resolution, Congress authorized NCUA to borrow from the Treasury. Last year, the balance rose to $5.1 billion. NCUA repaid $1.2 billion this year, leaving a current balance of $3.9 billion.
Through Sept. 30, credit unions had recorded a net profit of $6.3 billion this year, down slightly from $6.4 billion in the first nine months of 2012, according to reports filed with the NCUA.
Credit union lending continues to grow at a solid pace, up 6.7 percent since September 2012, to a total of $639 billion. Commercial bank lending grew by 3.3 percent in the same time period.
But Matz said credit unions must be cautious as they expand their lending. “As interest rates go up, credit unions could be caught between a rock and a hard place,” she said. “…As they make new loans at lower interest rates than older loans coming off their books they have been making longer-term investments to increase yield. If credit unions haven’t planned carefully the value of those investments could decline when rates rise.”
Says Dykstra, “Everybody has been concerned about interest rate risk.”
As a case in point, credit unions have increased their mortgage lending 7.7 percent since the end of December. But nearly two-thirds of the new loans have fixed interest rates. What that means is that when rates rise, as nearly every analyst expects they will, credit unions will have to pay more for the deposits they are taking in, but income from a substantial part of their loan portfolio will be fixed at lower rates. It was a similar mismatch that helped fuel the savings and loan crisis of the 1980s and early 1990s. Financial institutions that invest in long-term bonds also could see the value of those fall when rates increase, adding to the interest-rate risk.
There also are concerns about how the large number of small credit unions are faring. More than 3,700 of the 6,620 credit unions have assets of less than $25 million. By contrast, only 150 banks are that small.
In a recent report, the National Association of Federal Credit Unions said, “While credit unions as a whole are very successful at remaining competitive and serving the financial needs of their members, smaller credit unions are struggling to survive.”
Hunt says, “Smaller credit unions seem to face economic conditions more heavily than larger credit unions.”
With lower loan volume, it is difficult for smaller institutions to cover their operating expenses without either charging higher interest rates on their loans or paying depositors less. That makes them less competitive.
The report said membership, deposit and loan growth are all slower at smaller credit unions than larger institutions — trends that are becoming more pronounced. “As the overall cost of doing business rises, smaller credit unions fall behind, and consolidation and mergers are becoming more common in the credit union industry,” the report said.
Between July and Sept. 30, there were 58 credit union mergers, the NCUA said. Altogether, there are 1,348 fewer credit unions today than at the end of 2008, meaning that nearly 17 percent of the institutions have disappeared in less than five years.
Dykstra notes that only 18 credit unions remain in Nevada; at the end of 2008 there were 27. She doesn’t expect more mergers there, but in California she says, there is “more discussion about mergers and sometimes mergers of smaller credit unions.”
“I do not think we are near the end of consolidation,” Hunt says.