Wake-Up Call

The recession of the last two years has been a wake-up call for the credit union industry. Despite the continuing troubling signs in the economy and for individual credit unions’ financial performance, credit union boards and management keep hitting the snooze button hoping the problem will go away. For too many credit unions, by the time they wake up, it will be too late and they will be in a forced merger rather than having negotiating power to select the most favorable strategic partner.

In the fall of 2009 the National Credit Union Administration released the results of a two-year stress test on the credit union industry. In a worst case scenario, which included a more protracted downturn in the economy, a distressed real estate market, and adverse impacts of corporate credit unions, NCUA predicted 519 credit union failures.

On top of this there are all the credit unions whose performance will be severely impacted due to their low capital levels. The NCUA worst-case stress test scenario projected a possibility of over 2,100 credit unions within two years—a quarter of all credit unions—with net worth under 6 percent in the combined real estate and corporate stress test.

Unfortunately, many credit unions choose not to respond to early warning signs that they may be in trouble. And, when they ultimately begin looking for a merger partner, they are finding it increasingly difficult to find another credit union willing to take them on. Many larger credit unions are battling their own earning problems and lower capital ratios and are therefore unwilling to take on struggling credit unions that will further reduce capital and divert resources. The loser in the boards and management teams’ inaction are the members…

For the rest of this article originally published in CUES Credit Union Management Magazine visit: http://www.cues.org/article/view/id/Wake_Up-Call