LAKE BLUFF, Ill.- As credit unions enter 2013, they are faced with some sobering facts: A small percentage of institutions continue to drive most of the industry's growth, thousands of credit unions' earnings remain flat or in the red, and many analysts are forecasting the situation is not going to be getting better anytime soon.

Based on data from NCUA and CUNA Mutual Group, 2,000 CUs (29% of the entire industry) reported losses during Q3 of 2012, the majority (1,692) with assets of $50 million or less. While overall industry lending was up, 47% of CUs reported declines in loans between Q3 2011 and Q3 2012. Amazingly, just 2.8% of CUs accounted for 84% of all loan growth.

According to data from Moebs $ervices, Lake Bluff, Ill., 17.3% of all credit unions (1,212 out of 7,031) had negative net income for 2012, while another 26.1% (1,832 CUs) weren't growing enough to maintain capital.

Credit Union Journal queried a number of analysts and experts on the great divide in credit union earnings and membership growth, and while many cited different factors, the conversation frequently came back to the prolonged low interest rate environment and the economy-in particular that gradual economic improvements may help some credit unions stop the bleeding, if not get back into the black.


Irrational Exuberance, CU Style

Brian Turner, director and chief strategist at Catalyst Strategic Solutions, noted that some credit unions have been a bit over-exuberant in recent years preparing for rising rates, which has resulted in credit unions "unloading valuable assets or restrict[ing] prudent strategic alternatives that, as a result, have stolen contribution to capital by tens of millions."

"As the economic environment begins to improve, member behavior is reinstated and market rates again return to normalized levels, then financial returns will improve across the board," predicted Turner.

Turner compared the credit union community's current situation to that of community banks in the 1970s and 1980s when a similar debate flared about that industry's future. Turner suggested that maybe it's time for credit unions to think about abandoning the idea of being a one-stop shop for all financial needs.


Being Everything To Everyone

"If you're a credit union that wants to be everything to everybody-that's what I define as a primary institution-that's going to be a challenge, because that's costly and there's a certain level of commitment and investment," he said. "The focus needs to be on serving members and potential members. What products and services do they need versus what everybody else is doing?"

NCUA's chief economist, John Worth, pointed out that less than half of CUs under $10 million in assets (until last week the agency's threshold for a small CU) are seldom one-stop shops. Many don't offer checking accounts and instead typically offer a product menu tailored to a specific membership.

Bill Myers, director of NCUA's Office of Small CU Initiatives (OSCUI), added that small credit unions often serve specific groups with needs outside of the traditional financial services market. Products such as IDAs, payday loan alternatives and more, he said, arose as a result of small CUs responding to member needs. Many of the members using those services are not profitable to the credit union, or only slightly so.

The California Credit Union League oversees one of the few subgroups dedicated to smaller credit unions, the Shapiro Group. Diana Dykstra, president & CEO of the California/Nevada CU League, said that many smaller CUs have tried to compete by offering products and services for which they simply don't have the resources, which in turn has hampered growth and profitability.

"Successful credit unions pick those things that they're going to do better than everyone else and just let the other stuff go," she said. "And it may be mobile. It may be a credit union that has a high tech field of membership and mobile is the way to go. But for somebody in a plant, a single-sponsor credit union, mobile probably isn't that important."


Replacing Aging Members

Not everyone agrees with the theory that the "one-stop shop" strategy should not be pursued by every credit union. But many noted that CUs have not done as good a job as they should on replacing an aging member base. Catalyst's Turner said that the influx of young members as a result of Bank Transfer Day was largely an anomaly that only affected a few large CUs and was not "a long term trend or sign of things to come."

Indeed, between Q3 2011 and Q3 2012, CUs with assets in excess of $1 billion (195 CUs) accounted for 63.5% of all membership growth. During the same period, 3,485 CUs (50% of all CUs) reported membership declines, according to analysis by CUNA Mutual.

While the prevailing attitude has been that technology can help steer young consumers toward CUs and, in turn, generate new revenues, Turner discounts that thinking. "You have to have the technology, but I'm not so sure that the person that has the most bells and whistles is going to get the most marketshare out of things."


Bring On The Rising Tide

Dykstra also noted that geography plays into the issues of growth and profitability. She pointed out that credit unions in California and Nevada (and other stand states) have struggled due to home valuations and high unemployment, all of which may tack on as much as another three years before CUs in those states fully recover.

"A rising tide may lift all boats, but I don't think-at least over the last year or so-that the improvements have been as noticeable at small institutions, in part because they're much less likely to offer mortgage loans, and a lot of the big increases in income we're seeing are directly associated with mortgage refinance activity," said CUNA Economist Mike Schenk. "So they're kind of missing out on that."

Schenk noted that until recently consumers have shied away from making large purchases, such as buying houses and cars, "but that's starting to change, and small institutions should benefit from that."

NCUA's Worth noted that "the opportunity to go find loan demand and to increase the share of assets that are loaned out is going to be there in 2013."

But. he added, this year will also see CUs "at the same time trying to balance this desire to improve profitability-to get back deep out of the red and into the black-without falling into issues of searching for yield and taking on risk" or taking on assets that could prove problematic further down the road.


20/20 Vision

At the end of the day, is the so-called "great divide" reversible? It depends on whom you ask. A number of sources told Credit Union Journal that it's not unreasonable to expect the overall CU landscape to be pared down to as few as 5,000 credit unions by 2020. The assumption is the efficiencies created will add to individual bottom lines.

CUNA's Schenk noted that wherever the numbers end up, credit unions won't be alone. "We're certainly on a trajectory, but it's not just credit unions-it's banks as well," he said. "Consolidation in financial services is one of the defining characteristics of the last 30 years or so."

That's good news for CUs, Schenk believes. "The number of banks that have gone away over the last decade or so is almost exactly equal to the number of credit unions that have gone away. You might make the argument that the decline has been similar is a testament to the strength of the credit union charter, because banks on average are substantially larger than credit unions."

NCUA last week changed its definition of a small credit union, raising the threshold to $50 million from $10 million, which may make a difference as far as how those CUs are examined and the types and amount of assitance for which they are eligible (see related news, page 1).

The agency continues to view "small" as just one stage of a CU's evolution, and Myers noted that the number of small CUs (by NCUA's definition) dropped by 57% between 2000 and 2011. Nearly 2,200 (66%) of those merged with other credit unions, while 788 (24% of the total "lost" CUs) grew their way out of that small CU asset class.

"Will we get some of those small ones who might bite the dust as they get bigger? Yeah," said Moebs $ervices' Mike Moebs. "But right now we've got a base of 4,000 credit unions that are going to be around forever, as far as I'm concerned. We have 1,000 credit unions that worry me... and then we have the ones in between."

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