Deregulation Turns Credit Unions from Delicatessens to Supermarkets: Mergers Shrink Numbers but Increase Size and Services

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ST. PAUL -- Credit unions have been described as financial delicatessens: small neighborhood shops with a limited selection and a friendly, personable staff.

But recent changes in the financial industry have increased competition while allowing credit unions to become financial supermarkets. In fact, credit unions were the first group in the financial services industry to be deregulated, and they are still feeling the effects.

Says Allyn Long, nonbank supervisor in the Minnesota state banking department: "They had to grow and get profesional management. Things have become much more complex, and volunteers who run credit unions didn't have the expertise to handle that."

Yet some credit unions continue to be staffed by volunteers and offer a limited range of services.

Credit unions are much like savings and loan associations in that they are mutual associations, essentially not-for-profit, owned by their depositors. The crucial difference is that, unlike S&Ls, credit unions are not burdened with heavy mortgage portfolios and have not had to suffer the fallout from the interest rate crunch of recent years.

Deregulation has had a paradoxical effect on credit unions in Minnesota, as well as in the rest of the country: They have grown in size while they have shrunk in number. Credit unions that couldn't cope with the changes were merged or liquidated. Those that could cope have grown substantially.

Mergers and liquidations have cut the number of credit unions in Minnesota by 118 since 1970, from 415 to 297.

In the last three and a half years, there have been 36 mergers, three liquidations, and three new charters, reducing the total by 10%. National Total Down 10%

Nationally, there were 1,831 mergers, 866 liquidations, and 771 new charters in the same period, also reducing the number of credit unions in the nation by 10%, to about 16,500. Mergers and liquidations are common among credit unions, while new charters are rate.

"I think we'll continue to merge with small credit unions that are having difficulties," said Rod Lydon, head of the Minnesota Central Credit Union, which has absorbed many struggling credit unions in the Twin Cities.

Although no minimum standards for capital adequacy have been set by federal regulators, as have been set for banks and S&Ls, some credit union analysts believe the ratio of net worth to assets should be between 8% and 12%.

One expert, Joseph Lents, a partner in Nearman and Lents, a certified public accounting firm specializing in credit union auditing and management services, believes that 12% is the minimum ratio that directors should accept.

In fact, a recent public survey by the National Credit Union Association, a trade association for credit unions, showed a great deal of concern about the safety of financial institutions. Those respondents' had less faith in credit unions than other savings institutions, such as banks, S&Ls, and money market mutual funds.

As for Minnesota's top 50 credit unions, just 18 -- a little more than a third -- had net worth-to-asset ratios of 8% or more, including six that were at 12% or more. The total net worth for the 50 credit unions was $75.4 million, a net worth-to-assets ratio of 6.6%. Eleven of the credit unions lost money in 1982. Deregulation Offers Chance to Grow

Yet deregulation continues to provide credit unions with opportunities for growth. Assets of the state's credit u nions total $1.52 billion, having nearly tripled over the last eight years. (But in total, they still hold less than a fourth of the asset total held by First Bank Minneapolis, the largest bank in the state.)

This rapid growth owes much to the fact that credit unions were first in offering several new financial services. Indeed, they still can offer some services that banks and S&Ls cannot. And now, that deregulation has prompted many banks and S&Ls to emphasize retail banking for the elite, small consumers may increasingly rely on credit unions to provide their credit and savings needs. …