Post-coronavirus economy could reshape credit union charter landscape
The 2008 financial crisis may have just been a dry run for the economic shake-up that occurs as a result of the coronavirus.
That could have a dramatic impact on the credit union chartering and field-of-membership landscapes.
Along with a surge in mergers and liquidations, the years following the 2008 crisis also saw an increase in charter changes, including conversions to and expansions of community charters, and realignments of state and federal chartering. While some of those metrics have leveled out in recent years, industry observers say any or all of those could spike in the months and years ahead.
“One of the things that happened in the last crisis was the awareness of concentration risk was very heightened — not only in credit portfolios but in fields of membership,” noted Lucy Ito, president and CEO of the National Association of State Credit Union Supervisors. “Certainly in the last crisis, any credit union that was very narrow with its field of membership — say a particular employee group, a particular company or if that particular sector was hard hit in the last crisis — that made it very difficult ... [if] it didn’t have a diversity of membership to absorb what was going on.”
The number of active credit unions declined by about 30% between 2010 and 2019, while the number of members increased by roughly 33%. Mergers hit their peak between 2012 and 2014, with an average of 250 combinations each year, while liquidations in that same period averaged about 12 per year. In the majority of those instances, the institutions being absorbed or liquidated were smaller with more limited fields of membership, often serving a lone select employer group or a small group of SEGs.
Those types of credit unions have seen their numbers reduced dramatically in the last 10 years, and if the economic crisis from the coronavirus plays out as badly as expected, they could be one of the industry’s biggest casualties. For instance, BECU and First Tech are both largely SEG-based but are big and diversified enough to be relatively insulated from a downturn. However, that may not be the case for "a $300 million[-asset] credit union that’s highly dependent on a SEG," said Steve Williams, co-founder of Cornerstone Advisors.
“For small, SEG-based credit unions, it’s going to get very, very difficult,” he added.
The issue with being SEG-based, many said, isn’t so much that the credit union’s fortunes are sometimes dependent upon how well the sponsor performs, but that they lack a diverse FOM. Many federal credit unions adopted or expanded community charters in the years following the Great Recession, and those moves were up by more than 30% in 2011 and 2012 compared to the two previous years, according to NCUA. Aggregate data isn’t available for state-charters, but Ito said state-chartered shops generally followed a similar pattern.
“Since the last crisis, at the state level many regulators have enabled credit unions to have a more diverse field of membership, which is a legitimate safety and soundness decision to spread risk across a credit union’s membership,” she said.
Several states have modified their credit union statutes in recent years, including some provisions related to field of membership. NCUA has also made changes to its own FOM rules, but the controversy surrounding them — and the possibility the case could make it all the way to the Supreme Court — has likely kept some credit unions from taking advantage of them until the rule is codified and legal challenges are over.
“It’s very difficult just getting a field-of-membership expansion, but that doesn’t mean you’re going to get people running into your doors just because you got that expansion,” said Michael Fryzel, a Chicago-based attorney and former chairman of the NCUA board. “It takes a tremendous marketing effort going out and getting these people to join, and there’s got to be a reason for them to join. Previously we always talked about how credit unions had higher savings rates and lower loan rates, and now there’s no such thing as a savings rate to begin with.”
One factor that played to credit unions’ advantage after the Great Recession was the fact that the crisis was created by banks, and lingering resentment toward the big banks helped fuel at least some of the industry’s growth in the years that immediately followed. That’s not the case this time around, however, and many banks have taken steps to ensure they’re seen to be helping with the recovery.
'A huge revenue pinch'
Even if this crisis doesn’t result in a sea change of chartering or fields of membership, it’s likely to have a lasting impact on how individual institutions look at themselves, said Williams.
“For the next two years I see a strong focus on capital management and making sure we’ve got capital resiliency,” he said. “The big question mark is we have no idea what our loan losses through this crisis are going to look like, because we don’t know how long this unemployment and the shock to consumers and small-business income is, so we don’t know what level of government relief helps offset that.”
That’s worsened by the fact that it’s impossible to predict how consumers and borrowers will behave in regard to institutional lenders, he said, and the big question moving forward will not be about institutions’ charters or fields of membership, but about scale.
“I think this will be a catalyst for how to operate as a financial institution,” he said, adding, “I think institutions will look for more scale and I think regulators will look for more operational resiliency that will push them toward scale.”
Some also suggested that comparisons to the last crisis may not be apt. For one thing, in 2008 there weren’t widespread loan forbearance options that FIs are putting in place today.
Credit unions may choose to offer 90 days without loan payments, said Fryzel.
“But that means that credit union will not get that income during that period of time, and if they’re a large lender for homeowners and there is a sufficient number of individuals who are unemployed and asking for this to take place, that credit union is going to see a tremendous hit in their income for that quarter’s revenue," Fryzel added. "They may recover on the end of that loan, but that’s years away.”
“Credit unions will have shrinking auto loan portfolios and loans paying off at 3.5%, so that’s a huge revenue pinch credit unions will have to navigate through, and it’s going to be important that boards and regulators understand what’s acceptable earnings over the next two years and do the right thing, because they won’t be impressive earnings.”