Small CUs Struggle Despite Strong Economy

Though the economy is booming, it did not help credit unions that had to merge because of their financial challenges. In July and August, the NCUA gave the green light for 30 credit union consolidations, and a third of them, including a New York credit union that managed a $69 million taxi medallion loan portfolio, were deemed to be in poor financial condition.

Nonetheless, in the last two months of the summer, the NCUA approved strategic mergers or consolidations for “expanded services.” Those strategic mergers included two sizeable credit unions in Wisconsin and Minnesota, and one large consolidation between credit unions in California and Alaska.

From January to August, 120 mergers were approved, which is down from the 132 consolidations approved from January to August last year. It’s uncertain, however, whether the pace of mergers will continue to slow down, particularly strategic mergers, as some credit union executives have predicted, because of the controversial NCUA regulations that officially began on Oct. 1.

The $183 million Bay Ridge Federal Credit Union in Brooklyn, N.Y., chartered in 1934, was the largest cooperative that got the OK to merge in August because of its poor financial condition, according to the NCUA. The Brooklyn, N.Y.-based credit union was consolidated with the $1.5 billion Island Federal Credit Union in Hauppauge, N.Y.

Like several other credit unions that were either merged or liquated because of their non-performing taxi medallion loan portfolios, Bay Ridge, which managed $69 million in taxi medallion loans, fell into substantial financial challenges over the last three years.

While it posted net income gains of $1.4 million and $1.6 million in 2013 and 2014, respectively, its net income gains plummeted to just $76,413 in 2015 and $434,189 in 2016.

Bay Ridge’s financial condition got much worse in 2017.

At the end of last year’s second quarter the Brooklyn credit union recorded a net income loss of $2.1 million, a $2.6 million net income loss at the end of the third quarter and a $4.3 million net income loss at the end of fourth quarter of 2017, according to NCUA financial performance reports. And while its foreclosed and repossessed property was only $120,000 at the end of June 2017, that number soared to more than $3 million by the end of June 2018.

Glenn Christensen, president of CEO Advisory Group in Kent, Wash., who specializes in credit union mergers, said Bay Ridge’s demise occurred rather quickly.

At the end of 2016, the credit union’s net worth stood at 9.47% and dropped to 5.36% at the end of June 2018, while its delinquency rates skyrocketed. In 2013, the credit union posted a delinquency rate of 0.77%, which ballooned to more than 4% in 2017 and more than 7% at the end of June 2018, according to NCUA financial performance reports.

Island FCU President/CEO Bret Sears did not respond to CU Times’ email and phone requests for comment about the merger.

Under the “expanded services” reason for NCUA approved mergers, otherwise known as strategic consolidations, the largest merger was the $663 million Denali Credit Union in Anchorage, Alaska into the $1.6 billion Nuvision Credit Union in Huntington Beach, Calif.

“I think we’re seeing more and more credit unions that are looking at their geographic footprints, including their regional and national footprints,” Christensen said. “You have more and more different markets that respond differently to economic cycles and that helps alleviate some of the risks for credit unions by having a more diversified geographical strategy.”

The NCUA also approved the second and third largest strategic consolidations of the $348 million Mill City Credit Union in Minnetonka, Minn., with the $540 million City and County Credit Union in Saint Paul, Minn., and the $157 million Bull’s Eye Credit Union in Wisconsin Rapids, Wis., with the $1.8 billion Connexus Credit Union in Wausau, Wis.

Eight credit unions that got the green light from the NCUA to merge in July and August because of their poor financial condition were well under $50 million in assets.

Interestingly enough, despite the strong economy, six of these credit unions posted high delinquency rates or higher-than-peer-average delinquency rates over the last five years, according to their NCUA financial performance reports.

“The good economy has probably helped more credit unions, but it still remains true that small credit unions are still struggling to build their loan-to-share volumes,” Christensen said. “The competition from fintechs, from banks, from larger credit unions and changing consumer behavior makes it very difficult for small credit unions.”

In August, five credit unions, including Bay Ridge, got the green light to merge because of their poor financial conditions. The others were the $24.7 million Great Lakes Credit Union in Sylvania, Ohio into the $896 million Superior Credit Union in Lima, Ohio; the $7.6 million River Cities Credit Union in Alexandria, La., with the $20.4 million Valex Federal Credit Union in Pineville, La.;  the $2.9 million Arkansas City Teachers Federal Credit Union in Arkansas City, Kan., into the $35 million Arkansas Valley Credit Union, also based in Arkansas City; and the $1.9 million IBEW LU 278 Federal Credit Union in Corpus Christi, Texas with the $304 million Coastal Community and Teachers Credit union, also headquartered in Corpus Christi.

In July, four credit unions got the green light to consolidate because of their poor financial condition. They were the $19.6 million Savannah Federal Credit Union in Georgia with the $76.6 million Core Credit Union in Statesboro, Ga.; the $16.9 million Wood County Community Federal Credit Union in Parkersburg, W. Va., into the $175 million West Virginia Central Credit Union, also based in Parkersburg; the $6.9 million Credit Union of Leavenworth County in Lansing, Kan., with the $2.6 billion CommunityAmerica Credit Union in Lenexa, Kan.; and the $2.9 million Caano Employees Federal Credit Union in Kenner, La., into the $250 million Riverland Federal Credit Union in New Orleans.

Undoubtedly, more small credit unions will be merged out of existence for quite some time. But through the end of the year and into 2019, credit union executives will be closely watching whether the new and controversial NCUA merger rules will pump the brakes on strategic mergers or consolidations of large asset credit unions.

The new rules will require credit unions to revise and clarify the contents and format of member notices of a proposed merger, disclose certain merger-related executive compensation, increase the minimum member notice period and provide a method for members and others to submit comments to the NCUA at the proposed mergers of their credit unions.

The vast majority of credit unions that commented on the new merger rules opposed them before they were finalized. Credit union trade groups said the new rules were unnecessary and would do little more than delay mergers, increase costs and increase the regulatory burdens institutions face.

Christensen said he noticed a greater urgency from his credit union clients to complete their mergers before the new merger rules went into effect on Oct. 1.

While credit unions favor greater transparency for members regarding the merger process, he finds that many credit unions seem to be most worried about how the members’ comments on proposed mergers will be managed by the NCUA.

In a September letter to credit unions, the federal agency said once it gives the merging federal credit union the green light for a membership vote, the credit union must send a copy of the members’ notice to the Office of Credit Union Resources and Expansion 15 days before the member notices about the proposed merger are mailed. The notices must include a link that shows the web address for members to share their comments and/or ask questions about the proposed merger on a credit union-specific website. The same requirement is essentially the same for state-chartered credit unions unless the membership vote is waived by state law.

The NCUA’s Office for Credit Union Resources and Expansion will review each member comment or question about the merger before they are posted on a credit union-specific member-to-member website. However, the federal agency said it will reserve the right not to post comments that are false or misleading, relate to a personal claim or grievance, impugn a person’s character, or make allegations of improper or illegal conduct, among other things.