As events have unfolded over the past 18 months, some voices have risen to suggest that the credit union charter is at a competitive disadvantage versus other options.
Several factors have caused credit unions to listen to this siren call. We live in uncertainty. The economy has turned around, but the job market is still capricious. Credit unions must pay NCUSIF premiums, but there has been little to no information about what these could be. Agency audits and annual reports have not been published; there has been little transparency with corporate portfolios; and NCUA publicly refers to a legacy asset plan, but no one knows what that means.
With uncertainty a fact, it is easy to be drawn into false logic that projects extreme losses. How does one disprove a prediction? Since few if any foresaw the last recession -- even as events unfolded – the uncertainty makes fertile ground for false prophets who continue to foretell more catastrophe.
These commentators have an agenda, and it is not the well-being of the credit union system or its members. Rather their goal is to promote credit union charter conversions. Their message has appeal because fear can blind persons to facts they see with their own eyes. What are the commentators’ arguments, and what does the data show?
The first assertion is that consumers know what a bank is, but do not have the same knowledge of a credit union.
But on February 3, 2010, the New York Times published an article based on a Forrester annual survey. It said in part: “Credit unions ranked much higher than the big banks, as they have in previous years, with 70 % of credit union customers saying their financial institution put their interests first. . . After credit unions, the bank run by USAA . . . came in next with 64%. . . . The bottom seven of this year’s rankings, first to last, are Bank of America, Chase, Capital One, TD/Commerce, Fifth Third, Citibank, and in last place, HSBC.”
Consumers have seen bank behavior in this past recession – and they don’t like it. Moreover, dozens of local commentators, plus the national media including Business Week, the Wall Street Journal, the New York Times, CNBC, CNN, MSNBC, and more have all run positive profiles of credit unions extolling their differences. There may have been a knowledge gap in the past, but today credit unions are at a Tipping Point in terms of market acceptance.
Credit unions have slower growth in the commodity business, which requires constant new investment at a time when more are also transitioning to open charters.
But as shown in the data for 2009 (pages XX), credit union share growth at 10.4% was five times greater than that of banks. Thrifts’ growth rate was negative. Balance sheet loan growth was positive even with record sales to the secondary market, whereas the banking industry experienced the largest decline (at an epic pace, according to the Wall Street Journal headline) of negative 7.9%.
Since WWII credit unions have an average annual compound loan growth rate of 13.4%. In 2009, credit unions added $9.5 billion in small business loans, or more than each of the trillion-dollar banks did individually. Loans are the engine that drive the credit union business model regardless of field of membership.
Credit unions have higher expense structures and therefore are at a competitive disadvantage when pricing against banks let alone making future investments in branches.
Looking at the full year 2009 data, FDIC presents its analysis by grouping its institutions into four asset peer groups: under $100 million in assets, $100 to $1 billion, $1 to $10 billion, and over $10 billion. Over 70 % of banks’ assets are in the largest peer group, whereas only three credit unions are in this group with only 8% of credit union assets.
As shown in the data, credit unions have lower expense ratios in the two largest asset classes, and are very close in the bottom two. Credit unions over $1 billion have a less expensive cost structure than their banking peers do.
The operating efficiency ratio shows an even more dramatic result — in the largest three asset classes, credit unions have a lower, that is, better, efficiency ratio than do their banking counterparts. In the under $100 million asset class, the two groups are the same.
The possibility of significant unrealized losses in natural person and corporate credit unions means that the future holds the prospect of significant open-ended assessments by the NCUSIF.
This view has two components: 1) The banking industry is less stressed and subject to relative fewer failures than credit unions; and therefore 2) future FDIC premiums will be less than what the NCUSIF must charge.
But at year end 2009, credit unions’ collective balance sheets and earning power were significantly stronger than those of the banking systems. Average credit union delinquency was 1.85% versus 5.37% for banks. Bank charge-offs at 2.42% were double that of credit unions at 1.22%. Moreover, credit unions’ coverage ratio (the allowance account divided by delinquent loans), was 84% and rising while the banking industry’s was 58% and falling.
Credit union’s earnings in 2009 after all NCUSIF expenses were double the banking industry’s. Credit union capital was higher than the core capital at banks.
FDIC’s Financial Position vs. the NCUSIF’s
When you look at the financial situation of the two insurance funds, the FDIC has a negative reserves-to-insured savings ratio of (.39%), a fall from a positive .36% one year earlier. To restore the FDIC fund to the mandatory 1.15% ratio over the next eight years will require minimum average premiums of 19 basis points — and that assumes no losses greater than each year’s income.
The NCUSIF by contrast has a reserve ratio at February 2010 of 1.23%, composed of 1% capital ($7.1 billion) and $2.1 billion in retained earnings. These numbers do not include a loss provision of $726 million, an amount that if distributed in capital notes would bring every credit union with net worth below 7% at December 31, 2009 up to a well capitalized level. Moreover, the NCUSIF balance sheet is relatively “clean” with almost all of its assets in cash at the Treasury. The FDIC’s balance sheet is encumbered with billions of acquired assets of failed institutions.
NCUA currently estimates the loss on the corporate network at just under $5.0 billion. A 10-bp premium on the current amount of $740 billion of insured shares would cover this loss in less than seven years.
The final charge is that the NCUA is a weak and ineffective regulator and that credit unions have been unsuccessful in achieving their legislative goals, whether this be CURIA, member business loan relief, or alternative capital.
The current legislative agenda has been largely aimed at correcting abuses in the banking industry, whether this be the CARD Act, overdraft reform, mortgage licensing, or other areas of consumer protection. While there will be costs of some of these reforms for credit unions, the legislation is focused on curbing bank abuses. NCUA has been left alone in terms of structural reforms, and the legislative calendar is still open on member business loans and alternative capital.
Some former bank managers now working in credit unions contrast FDIC’s abrupt style for closing and liquidating banks with the more deliberate and extended practice in credit union oversight. However, in the “healing” of problem institutions, time and taking the long view can be an advantage, because the only true solution for any financial institution problem is regaining future earnings power. For credit unions, that is the primary source of capital. Patience can be a virtue, not a weakness.
A Positive Faith in Future Forecasts
The recession crisis is over. The shape of the recovery is becoming clearer daily -- first in service sector hiring, then manufacturing. Often times the “grass is greener” is nothing more than an academic exercise that deflects attention from the tough challenges of better execution where we are.
All industry data comparisons, not to mention the positive public media comments, suggest that the credit union industry is better positioned than other charters. But the biggest advantage not captured in the data is that credit unions also have the benefit of a cooperative system that is investing every day for better member value. Across the operational and lending spectrum, credit unions have cooperative choices not available in banking.
So while it may be true that an institution can be strong and survive on its own as do thousands of banks and thrifts, it is equally true than an institution cannot be a cooperative on its own. That interdependency, although it periodically brings difficulties, is the fundamental source of credit unions’ success. It is the grace of the cooperative model — it is why members come first and why America has increasingly singled out for praise credit union performance in the Great Recession.