Credit Unions are a Growing Force with Increasing Risk

Credit unions have grown to become a major factor in the U.S. economy, with assets that have grown at nearly twice the pace of banks’ over the past decade.1 Credit unions are owned by their members and are designed to offer lower borrowing costs and higher deposit rates. In addition, the median large credit union (greater than $50 million in assets) earned a return on equity (shares and reserves) of 3.6% and experienced 3% loan growth over the past year.

IDC Financial Publishing (IDCFP) focuses on 2,514 credit unions with $50 million or more in assets to determine the risks to the financial system. These larger institutions are using their strength to compete aggressively for business. The group of 2,658 credit unions with assets less than $50 million remain important to the industry but are not a major risk factor in a potential economic downturn or the overall health of our financial system.

The Risk in Large Credit Unions

IDCFP calculated the CAMEL rating of 5,172 credit unions in the first quarter of 2021. The 2,514 large credit unions account for 97% of total credit union assets and remain a potential risk factor in a future major economic downturn.

To determine this risk, we separate the credit unions ranked under 125, which is below-investment-grade and the industry standard. As of the end of the first quarter 2021, 302 large credit unions were ranked below 125 by IDCFP, up from 232 the previous quarter. This rise in institutions is the first risk alert, which is confirmed by all components of CAMEL hitting lows and rising. Some of the components are increasing, however, institutions with less than 5% adequate capital did not change from last quarter, and those with negative liquidity remained at zero (see Table I).

The “C” in CAMEL, which represents insufficient capital reached a low of 75 in the fourth quarter of 2019 and rose to 236 in 2021Q1. The “A” in CAMEL, or adequate Tier 1 capital to meet loan delinquency, reached a low of 3 in 2018Q1, subsequently increased to 5, and remained there in 2021Q1. The “M” in CAMEL, which measures operating profit margins with high-risk characteristics, reached a low of 4 institutions in the second quarter of 2019 and rose to 39 as of 2021Q1. The number of institutions below investment grade under “E” with negative earnings also reached a low of 40 in the fourth quarter of 2019 and rose to 153 in the first quarter of 2021 (see Table I).

We have seen an increase in the total number of large credit unions ranked below 125, in addition, four out of five components of CAMEL reached a low and increased in number. Because of these combined trends, IDCFP forecasts potential risk to come in the credit union industry, making it increasingly important to monitor. Hopefully, the post Covid-19 economic recovery, with strong growth in employment, will heal the ills currently seen in large credit unions.

Table I

The Risk Illustrated by IDCFP in 2005 to 2007 Forecast the 2008/2009 Credit Union Crisis

IDC successfully indicated a risk alert for the credit union industry as early as the fourth quarter of 2006, over a year prior to the financial and economic collapse of 2008 and 2009. Out of the 1,862 large credit unions in the third quarter of 2006, 108 were ranked below 125, or less than investment grade. The increase to 115 in the fourth quarter signaled the major risk alert for credit unions.

The “C” in CAMEL bottomed at 117 in the third quarter of 2006, but then recycled when it hit a low of 101 in the third quarter of 2007. The “A” low of zero was in the first quarter of 2005, the “M” low of 8 was in the fourth quarter of 2005, the “E” low of 31 was much earlier, in the first quarter of 2003, and the “L” component of CAMEL was zero in the second quarter of 2006.

In summary, IDCFP’s risk alert for the financial downturn of large credit unions, as well as, the entire credit union industry, was evident in the fourth quarter of 2006, successfully forecasting the financial problem to occur in 2008 and 2009 (see Table II).

Table II

1: How Credit Unions Outgrew Their Down-Home Reputation, Wall Street Journal, 12.3.2019

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John E Rickmeier, CFA, President,

Robin Rickmeier, Marketing Director