Credit unions weather tough market

From Bankrate.com, an article about how credit unions are outperforming regular banks:


The Web site for Agriculture Federal Credit Union greets visitors with a statement meant to drive home the safety and security of deposit accounts at the institution.

Credit unions are structured differently than their bank counterparts and, although they are far from immune to the mortgage and credit debacle, most of them may be getting through the current landscape in fairly good shape. Nevertheless, a number of credit unions are taking the same route as Agriculture FCU and attempting to allay any consumer concerns.

"The reason we put the message out there was more proactive," says Margie Click, CEO at Washington, D.C.-based Agriculture FCU. "I came through the failed savings-and-loan era and I want to make sure that our members know we're OK. We've had our challenges, although nowhere near what some of the others have had. I think that any financial institution that says they've had no impact isn't telling the truth."

Dan Kampen, CEO at The Rochdale Group in Overland Park, Kan., a consultant to credit unions in the implementation of new lending programs, says credit unions have found trouble when they've taken a different risk posture than is normal for a community-type institution.

"Credit unions are cooperatives -- profits flow to the members of the cooperatives; while bank profits accrue to the benefits of stockholders. Most of the credit unions where the failures hit the headlines probably involved themselves in programs -- whether an individual loan type or a purchase of loans from a third party -- where they didn't understand the risk, or they didn't have the mechanisms in place to adequately control and monitor the risk.

Kampen suggests that the cooperative nature of credit unions will be a key in staying financially healthy.

"In the for-profit sector, given the level of competition, you probably wouldn't see those best practices being shared. Even credit unions in the same geographic region will sit down and talk about what works well in terms of mitigating the risks and lowering the losses."
U.S. credit union profile (as of March 30, 2008)
Numbers of credit unions 8,208
Assets per credit union ($ mil) 98.1
Total assets ($ mil) 805,210
Total loans ($ mil) 542,626
Total surplus funds ($ mil) 230,278
Total savings ($ mil) 679,098
Total members (thousands) 88,898
Source: Credit Union National Association

Data from the Credit Union National Association, or CUNA, a national trade association serving credit unions, show some interesting numbers at a time when the financial markets were struggling.

* Fixed-rate first mortgages increased $6.3 billion (annualized rate of 24.21 percent) during the first quarter 2008 compared with same period in 2007.
* Adjustable-rate first mortgages increased $2.3 billion (annualized rate of 12.04 percent) during the first quarter 2008 compared with the same period in 2007.
* Aggregate loan delinquency decreased slightly from 0.93 percent to 0.91 percent of total loans outstanding.
* Delinquent real estate loans in federally insured credit unions increased from 0.67 percent at year-end 2007 to 0.70 percent through first quarter 2008.

"For the first three months of 2008, loan originations by credit unions went up dramatically vis-à-vis where they were historically," says Walter O'Haire, senior analyst in the banking group at financial consulting firm Celent. "The large lenders still dominate, but credit unions went from having less than 2 percent of the first-mortgage market share to over 3 percent versus the first quarter of 2007.

"What we're seeing on a local basis is credit unions stepping into the breach and saying, 'We're willing to sit down with you.' It's the old-fashioned model -- knowing the area where your customer lives, getting to know your customer, and being able to go through it with them."


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Although membership growth has remained fairly steady for the past couple years, some credit unions are seeing an increase in applications, says Ray Springsteen, senior vice president for business development at Callahan & Associates in Washington, D.C.

"We've seen credit unions get more publicity recently. I spoke with a Seattle credit union yesterday that says its membership growth is up 7 percent year-to-date. Most credit unions are focused on providing value to their members and not going out looking for the quick money." (Watch video on joining a credit union.)

Are deposits insured?
The National Credit Union Association wears two hats: It is the federal agency that charters and supervises federal credit unions and it operates the National Credit Union Share Insurance Fund, which insures deposits in all federal credit unions and many of the state-chartered institutions. Just as with banks, credit union deposits are insured up to $100,000 in regular share accounts, and up to $250,000 in certain retirement accounts.

The regulatory agency says there have been nine credit union liquidations so far this year; no more than normal -- and that not all are attributable to the mortgage crisis. Problems have been isolated, not systemic, and they hope to keep it that way.

"We have seen an increase in the level of delinquency and charge-offs, but they're still considerably lower than industry averages," says NCUA spokesman John McKechnie. "It may have something to do with the fact that we've been issuing guidance to credit unions since 2004, before the housing downturn developed, where we tried to make sure credit unions stayed on the right side of the road when it came to mortgage lending."

A recent Wall Street Journal article, "Mortgage-Market Trouble Reaches Big Credit Unions," noted that "five of the nation's largest credit unions are reporting big paper losses on mortgage-related securities."

Those institutions are corporate credit unions -- described by McKechnie as credit unions to credit unions. "There are 28 corporate credit unions. They help credit unions invest and stay liquid. They're monitored daily in terms of their balance sheet, their outflows and liquidity. Liquidity is the primary factor that determines how safe and healthy an institution is. The liquidity positions in those corporates are strong, but they definitely feel the draft that's coming in from some of the bigger problems in the credit industry."

McKechnie says the NCUA is continually monitoring for trouble spots and making every effort to ensure that examiners anticipate difficulty before it materializes.


[Edit: An NY Times article criticizing overdraft fees has this little snippet: ""This is one of the reasons I have stopped doing business with banks. All of my accounts are in credit unions," posts Hunter in Brunswick, Maine. "I have found you get better service and very low or no fees on most of the things banks charge big bucks for.""]