A Tale of Two Movements
The state of the CU movement is vastly improved, but challenges remain, especially for small CUs.
While credit unions have posted impressive operating results as of late—membership growth is at decade-long highs, earnings have increased to near-normal levels, and asset quality has improved dramatically—operating success varies dramatically by geographic location, field of membership and, in particular, asset size.
Overall, credit union membership grew 2.1% in 2012 and 2.2% for the year ending September 2013, according to CUNA’s economics and statistics department. These growth rates exceed the rate of U.S. population growth by a factor of more than two.
But the nation’s smallest credit unions generally have not benefited from these trends. Credit unions with less than $5 million in assets experienced a 2.2% decline in memberships for the year ending June 2013.
Only the largest institutions—those with $100 million or more in assets—posted significant gains during that period.
The inability to attract and keep members is a source of deep concern. Membership growth is a key measure of relevance in the marketplace and the general health of the membership base (both sponsor groups and communities).
Declining relevance is especially difficult to battle because consumers are placing bigger demands on financial service providers, and the services consumers want are increasingly complex and expensive to build (or acquire) and maintain.
Disparities similar to those seen in membership growth rates can be seen in other areas as well.
A stronger job market, decent consumer income gains, and low market interest rates have produced massive mortgage refinancings and given expression to enormous pent-up demand for both autos and housing, which has credit union loan originations soaring.
Collectively, credit union loan originations hit a record $329 billion in 2012—a 26% jump compared to 2011. They’re on a first-half pace to hit a record of nearly $360 billion for full-year 2013, which would be nearly a 10% increase over 2012 results.
Despite decent overall loan growth, small credit unions collectively are posting weak loan portfolio gains or outright declines. Credit unions with less than $5 million in assets had a nearly 1% decline in loan portfolio balances in the year ending June 2013, while those with $5 million to $20 million in assets posted a paltry increase of only 0.8% in the period.
Why the weakness? Small credit unions are much less likely than their larger counterparts to be active in the first mortgage arena. While nearly all credit unions with assets of more than $20 million offer first mortgages, only 10% of those with less than $5 million in assets do so, and less than half of those with $5 million to $20 million in assets are active in the mortgage game.
The earnings front
U.S. credit unions have posted high and near-normal earnings despite significant interest margin compression.
Asset yields have fallen faster than funding costs (which can’t decline much more). But higher fee income and operating expense control (including declining corporate stabilization charges) have combined with lower loss provisions to push movement-wide return on assets (ROA) up from a cyclical low of 0.18% in 2009 to 0.50% in 2010, 0.68% in 2011, and 0.84% both in 2012 and in the first half of 2013, annualized.
Small credit union earnings have improved over the cycle but are appallingly low compared to those at larger institutions. While some might argue that low earnings benefit members, the data make it clear that many now are not earning at rates that would support capital growth in the face of asset increases.
Indeed, the nation’s smallest credit unions are earning at only break-even rates. At the other end of the spectrum, however, credit unions with more than $100 million in assets are nearly back to normal earnings rates, with average ROA of 0.91% (annualized) in the first six months of 2013.
Looking a bit deeper, it’s easy to see why. Although small credit unions tend to have relatively high net-interest margins, their reluctance to increase fees or offer fee-based services, lack of scale economies, and fewer resources available to chase delinquent borrowers all translate to relatively low fee income, high operating expenses, and higher loan loss provisions.
Averages can be misleading
Of course, asset group averages can be misleading. Small size doesn’t necessarily relegate a credit union to low growth and low earnings. And, in a similar vein, not all larger credit unions are growing quickly and earning at high rates.
In fact, hundreds of small credit unions exceed movement norms in membership growth, loan growth, and in bottom-line results. While it’s clear that larger credit unions are more likely to exceed those norms, it’s also clear that some larger credit unions are wrestling with the same challenges facing smaller credit unions.
Small credit union managers will tell you that the operating challenges are large and growing. Consolidation pressures will continue and for a variety of complicated reasons that have no easy answers. There are no silver bullets. No magic formulas.
But many of those same credit union professionals are quick to point out that a variety of initiatives—from new strategic alliances and collaboration efforts to more focused niche strategies and regulatory relief efforts—are having a positive impact.
They’ll also tell you that while they are not always obvious in group averages and statistical reports, the success stories are there. They’re inspirational. And, more importantly, they can be—and are—being replicated throughout the movement.
MIKE SCHENK is vice president of CUNA's economics and statistics department.