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Worth banking on: finding safety in credit unions

If you notice longer lines at your credit union’s tellers or drive-through lanes, blame the implosion of commercial banks and financial institutions. Money is moving toward credit unions and away from their commercial counterparts, and the reason can be expressed in two words: fear and anger.

The fear ramped up during the Washington Mutual collapse, and the anger came later, at news of million-dollar bonuses for the Wall Street financiers who drove the financial system into the ground. Similar emotions were stirred in the savings and loan collapse of the late 1980s.

A wave of new credit union memberships came in September, about the time of WaMu’s collapse and a coincidental internet marketing promotion by the state’s credit unions. The state’s largest credit union, the Boeing Employees Credit Union (BECU), which as a community credit union is open to everyone, saw its rate of membership growth jump more than 50 percent in the last half of September, Tom Berquist, senior vice president, told Puget Sound Business Journal .

The good news of this growth needs some qualification: Memberships continued to increase the remainder of the year, although random checks of the state’s credit unions show a leveling-off of new memberships in the fourth quarter. While business remains sound, most Washington credit unions have also seen more delinquent loans, very slow growth in the average member’s deposits, and a stagnant or declining return on assets. All of this despite an overall increase in membership and deposits.

Credit unions are preparing for harder financial times ahead, evidenced by an increase in funds set aside for future loan and lease losses. BECU held $45 million in this account a year ago; it has increased the allowance to $112 million; other smaller credit unions are also holding more funds back to deal with the danger of future losses.

Fourth-quarter filings with the National Credit Union Administration (NCUA), the federal agency charged with oversight of credit unions, show most Washington credit unions down from December 2007.

Eighteen federally insured credit unions failed through December, according to NCUA. None of the failed institutions are in Washington, but several Washington credit unions merged or changed names.

(Small banks based in Washington also reported lower earnings in their quarterly filings: blame the housing market. Fourth-quarter filings showed double-digit percentage losses for some banks, after profits in the first three quarters. Tuesday, City Bank of Lynnwood joined the list of state banks facing financial difficulties, the Seattle Times reported.)

Other forward-looking by credit unions is happening: The NCUA said last week that it would guarantee uninsured-lender assets through next month and set up a voluntary program through 2010. The U.S. Central Corporate Federal Credit Union will get a $1 billion injection that will raise the public’s confidence in credit unions, NCUA said. Central is a mid-level player in the credit union field, a cooperative “central bank” for nearly 9,000 credit unions nationwide. The $1 billion is essentially an internal transfer of credit union funds, not federal funds.

The ways in which credit unions differ from banks are especially appealing right now. Credit unions are less vulnerable than commercial banks to market swings, and they don’t pay mega-bonuses to executives or fly bigwigs around in corporate jets. Credit unions were not involved in subprime lending and were less likely to inflate appraisals. Deposits are federally insured up to $250,000 and, in a time of fiscal turmoil, the familiarity of a community institution is comforting to many.

Credit unions also concentrate more than banks on consumer loans, credit cards and residential mortgages, notes John Annaloro, president of the Washington Credit Union League. Automobile dealers, currently hard-pressed to move inventory, are jointly promoting sales with credit unions, which historically been big sources of auto loans. (Annaloro cites this as a clear reason for increases in credit-union memberships.)

Credit unions don’t offer shareholder dividends, but in order to serve their community they need to show a return on assets, historically benchmarked at about 1 per cent according to WECU President Wayne Langei. WECU did better than most in 2008, reporting a fourth-quarter ROA of 1.46 percent, but that was down from a very strong 2.12 a year before.

Several Washington credit unions are struggling to maintain a positive ROA ratio. Annaloro says many credit unions have decided on less-ambitious ROA targets in the present financial environment.

Whatcom Educational Credit Union (WECU) board member Kristi Tyran, a business professor at Western Washington University and a former commercial bank officer, thinks credit unions remain strong because members and boards are not driven by profit but by a sense of community, good service and other intangibles.

“They (shareholders) borrow each other’s money,” she notes, adding that credit unions are limited in risk-taking by law and history. Delinquent loans, which make up 1.85 percent of WECU’s portfolio, as contrasted to 1.03 percent in January 2007, are “not bad loans, they are people going through bad circumstances.”

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