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Mixed forecast for credit unions

ALBUQUERQUE, N.M. — New Mexico’s credit unions survived a once-in-100-years financial panic and the worst economic contraction since the 1930s, thanks in part to member loyalty and little or no exposure to the risky real-estate lending that put some banks out of business.

Now they are trying to weather an increasingly expensive regulatory environment and a changing competitive landscape. Some of the smaller credit unions are not expected to survive as independent financial institutions.

Credit unions are member-owned cooperatives. There are 49 of them in New Mexico, according to the Credit Union Association of New Mexico. The largest, Sandia Laboratory Federal Credit Union, has assets of $1.9 billion. The smallest, Colfax School Educators Credit Union, has assets of $406,000. Statewide, credit unions have about 650,000 members.

Two things set credit unions apart from other financial institutions, said Sylvia Lyon, CUANM president. Because there are no stockholders or other earnings-seeking owners, credit unions need profit levels only high enough to make business sense and to satisfy regulators. And, Lyon said, “When no one else will talk to you, you go to your credit union. When no one could get a loan from another financial institution, you hear the story time and again: the credit union listened to me and gave me the loan when no one else would.”

No shutdowns

It’s not that credit unions give away the store. Most of New Mexico’s credit unions have capital ratios, which are a measure of solvency, comfortably in double digits. The recession killed two major locally owned banks in New Mexico but it claimed no credit unions, Lyon said.

Credit unions didn’t exactly skate through the recession. Brian Turner of Catalyst Strategic Solutions, a consultant to the industry, said job losses and the worry over job losses during the recession kept consumers from buying cars and other big-ticket consumer items “that happen to be what credit unions are in the business of extending credit for.”

Vehicle loans for credit unions nationally declined 5 percent in 2010 and grew only 0.5 percent in 2011, Turner said. Last year vehicle lending increased 8.2 percent over the previous year.

Nationwide, credit unions have become important real-estate lenders as well, Turner said. About 54 percent of credit union loans are mortgages, home-equity loans and the like.

Niche markets

Many of New Mexico’s credit unions serve niche markets, which can help or hurt during bad times. Kirtland Federal Credit Union was established to service Kirtland Air Force Base personnel, contractors and their family members. The recession had little effect on the credit union because defense spending wasn’t affected, Kirtland FCU President David Seely said. Conversely, federal budget cuts will require the base to furlough civilian employees beginning in July, which should affect loan demand, Seely said.

Loan demand at Chino Federal Credit Union in Silver City fluctuates with the price of copper, which, along with Western New Mexico University, is a mainstay of the local economy, said CEO Greg Shaver. Prices were down five years ago, he said. “We had rising loan delinquencies. We had troubled times here.” Higher copper prices beginning in 2009 have been followed by increased loan demand.

At the same time Kirtland FCU anticipates lending difficulties, it is facing new competition, Seely said. Navy FCU, based in Vienna, Va., with $54 billion in assets (compared to Kirtland’s $636 million) has opened a branch in Albuquerque and is competing for Kirtland FCU’s traditional customers. Seely said that it is unlikely Kirtland Air Force Base will grow, even if budget cuts are restored, so Kirtland FCU will have to begin looking for new markets some time soon.

CU challenges

Regulation and interest rate risk are challenges facing all credit unions. The cost of complying with new regulations might drive smaller credit unions to merge with larger ones, Lyon said.

“It is so overwhelming,” Shaver said. “We spend so much time making sure we’re compliant that small credit unions find it difficult to make income because they have to get compliance help.”

If a credit union offers mobile or online banking, there are security regulations to meet, Shaver said. The Patriot Act requires credit unions to collect information on new customers. The new Consumer Financial Protection Bureau is expected to promulgate many new regulations. Credit unions that offer real-estate loans face complicated rules requiring them to report loan activity to regulators.

“Every year, it’s something new,” Shaver said.

Seely was once a credit union examiner and recalls enforcing two- and three-page regulations. “Now they are 1,000 pages and they are really difficult to read and understand, then comply with,” he said.

“If you’re a larger credit union you can hire the talent and pay for a compliance officer and for training,” Seely said. “The smaller credit union has the same requirement, but it doesn’t have the resources to hire someone with that skill set.” The cost of regulation was one reason New Mexico Energy FCU with $48.6 million in assets merged with New Mexico Educators FCU ($1.27 billion in assets) earlier this year, he said.

Rate risks

Sooner or later the world’s central banks will stop printing money and let interest rates rise, which will present credit unions that make real-estate loans with new challenges. The credit union might make a 30-year mortgage loan this month at 4 percent or so while it pays depositors less than 1 percent for the use of their money, a better than 3-percentage-point spread between lending rates and the cost of funds.

Should interest rates rise and credit unions suddenly find themselves having to pay depositors 5 percent, that 30-year mortgage could be costing the credit union money if it’s still on the books.

Chino doesn’t have the staff with the expertise to do mortgage lending, Shaver said, and the risks of mortgage lending look pretty big to him.

“If I take on some mortgages and rates start going up, if you have a 3.5 percent mortgage for 30 years and mortgage lending rates go to 8 percent, you’ll keep that 3.5-percent loan forever,” Shaver said. “If rates go up, we could get killed, as small as we are.”

Kirtland FCU handles the risk by selling its mortgages to Fannie Mae, though it services the loans it makes.