WASHINGTON – As credit union losses mount across the country, experts are urging managers and boards to be measured in their response.
“The sky isn’t falling. The numbers for credit unions will be deteriorating. Net income will fall,” said Bill Hampel, chief economist for CUNA, who urged managers not to respond by cutting dividend rates and services, lest that exacerbate the situation and lead to further diminishment of income potential.
The CUNA economist’s words come as increasing numbers of credit unions around the country, especially those in hard-hit markets in California, Florida, and the Midwest, are reporting huge losses.
Last week, Eastern Financial Florida CU reported a $49.5 million fourth quarter loss and a $45.2 million annual loss. Meriwest CU reported an $11.4 million fourth quarter loss and a $9.2 million loss for the year. CommunityAmerica CU reported a $9.9 million loss for the fourth quarter and a $6.7 million loss for the year. And dozens more credit unions reported losses of more than $1 million for 2007.
In a new report on the U.S. Mortgage Crisis, the CUNA economics staff says rising delinquency and loan losses require close monitoring and active collections, but not necessarily tightening of credit standards. “The best response to a decline in net income caused by rising loan losses may be to adjust your budget and then carefully let it happen,” says the report.
Hampel notes that credit unions are now sitting on near record capital reserves and said they should use those reserves, rather than cut services, to cushion the blow of what is being recognized as a recession.
“You build capital for a rainy day,” Hampel told the Credit Union Journal. “It’s raining pretty hard in certain parts of the country. Open up you umbrella. That’s what it’s there for.”
The CUNA staff predicted many credit unions will see their loan losses double or triple as a percentage of their loan portfolios. But that is from near all-time low delinquency and charge-off rates. Charge-off rates for real estate loans, for example, are just 0.02%, an insignificant amount.
“My concern,” said Hampel, “is that credit unions don’t overreact. This situation is external, but it’s temporary. It might last for a couple of years.”
The economic downturn is expected to have some positive effects on credit unions by increasing deposits and assets, as members are expected to borrow less and save more.
