The number of credit unions in the United States will shrink to approximately 6,000 by the year 2010, just a quarter of the CUs that existed in the mid-1970s, according to former NCUA Chairman Dennis Dollar.
Dollar said driving the ongoing consolidation will be voluntary mergers as credit unions seek additional economies of scale. Dollar, who now consults through his firm Dollar & Associates, Birmingham, Ala., predicted those mergers will not just be among the smallest credit unions, noting, "No matter how we may view a big credit union, the assets of every credit union in America doth not a Citibank make."
In fact, Dollar said perceptions that small credit unions are disappearing are inaccurate. "I do think the demise of the small credit union is vastly overstated." He pointed to figures showing that of the 9,208 CUs at year-end 2004, 5,691 (61%) have assets of $20 million or less. Dollar was in Chicago for NASCUS' annual conference.
For credit unions of all sizes, the key determinant of success in the coming decade will be the ability to strike a balance, Dollar believes, in all areas, including fee income, pricing, and even communicating what the credit union is about.
In the short term, he noted that credit unions are safer, sounder and stronger, and he pointed to an historic high of 10.97% capital (net worth) for the industry. The only exception to the positive numbers: membership growth.
Where federal and state regulators are both now focused, said Dollar, is the interest-rate environment and the pressure that will begin to mount on fixed-rate mortgages and the fact yields will increase only slightly on interest. Loan diversification will remain key, said Dollar, acknowledging that lending will remain tough and that more creative mortgage products are going to be necessary.
The Balance Involved In Fee Income
There is also another balancing challenge, he said, observing that "fee income will become crucial to credit union bottom lines," but then adding, "If our fee structure remains the same as some of the for-profit institutions, a lot of members are going to ask 'Where is the value?' in belonging to a credit union, and it will be that much harder to get them to stand up in defense of credit unions before Congress and legislatures.
Fee income, said Dollar, is not inconsistent with credit union philosophy. Rather, he stressed, greater fairness and enhanced marketplace sensitivity in fee income is a credit union member service opportunity.
Dollar also sees tremendous ongoing opportunity in CUSOs, especially CUSOs jointly owned by multiple credit unions that bring greater economies of scale and enable smaller and moderate-size CUs to offer more competitive services.
What else lies ahead for credit unions? Repeating a statement he made often while chairman, Dollar said "it is the size of a credit union's vision, not the size of a credit union's assets, that will determine its long-range future."
As for small credit unions, Dollar noted that all regulators are concerned over the fate of small CUs, yet added, "I do think the demise of the small credit union is vastly overstated." He pointed to figures showing that of the 9,208 CUs at year-end 2004, 5,691 (61%) have assets of $20 million or less.
"Why in America would we ever want to penalize small institutions that have served their members well and grown," he asked. "That's one of the problems I have with our banker friends. The fundamental structure of the credit union has not changed because it has grown. It should not be penalized because it has served its members well and grown. It should be commended. Does size within itself make a not-for-profit less noble?"
FOM diversification will continue, predicted Dollar, who said that all regulators should count as one of their "prouder moments" the fact they have helped push through rules for expanded FOM.
Diminishing membership growth is another "challenge," according to Dollar, who noted the 1.48% growth in 2004 was the slowest pace in 15 years, despite the fact credit unions have more access points than at any point in history. "We do have to look and ask what is it about credit unions that is keeping us from drawing members at the pace we would like," he asked. He pointed to the U.S. population of 180 million people who are age 18 or over. Removing minors and duplicate memberships, about 40% of the U.S. population aged 18 and older belong to credit unions, he said. Yet credit unions have just 6.5% of deposits in insured institutions (3% of all deposits), and just 3.4%of U.S. checking accounts and 1.8% of mortgages, Dollar said.
"We, as an industry, have got to take the lead in showing why there is a value in belonging to a credit union," said Dollar. "That is not a job for NCUA or state regulators."
Dollar said he frequently needs to remind audiences that credit unions do not pay a corporate income tax "because of the structure, stupid." "Every business in America has an option when it is chartered of registering as a for-profit or not-for-profit," noted Dollar. "With each comes certain advantages and disadvantages."
The fight to retain the tax exemption is important, he said.
"If the tax fight is lost, it will be the end of credit unions as we know them," said Dollar. "After taxation, we would see wholesale conversions to mutual savings banks and stockholder-owned banks. Survival would be dependent on other forms of capital which, if not approved by Congress, will kill credit union growth. There would be fewer credit unions, smaller credit unions with less capital to withstand tough times. There would be potential taxpayer liability for more failures, and less political support."
Regulators & Conversions
As for conversions to mutual savings bank charter, Dollar doesn't believe the trend will abate. "I maintain that is an issue we are going to see more and more of. I don't think it's going to be a major trend; there have only been 27 conversions over the past 10 years," he said. "But one trend we have seen is that once they convert to mutual savings bank, three-fourths convert to a stock-issuing institution, and members should at least know what the possibilities are that that might occur. I think honest, fair elections with integrity are necessary, and if that doesn't happen, I think regulators need to say we cannot approve this."
In charter conversions, the role of regulator in conversions is twofold, said Dollar: One is to maintain the integrity of the disclosures, the elections and the process, and the second is to create a regulatory environment that adds value to the CU charter helping credit union leaders and members decide to prosper as credit unions."
Dollar also stressed that he believes credit unions do a terrific job serving the underserved, and a terrible job documenting it. "We don't have the empirical data to go to a congressman and say, 'we made X number of small loans in your district.' I think that documented service to the underserved is imperative politically."
