Third Quarter Highlights Show Credit Union Shifting Away from Being "Niche Players"
WASHINGTON - Third quarter industry data indicated that credit unions are in a "state of equilibrium" as they transform from niche financial players to public financial players. This was the summary of several key highlights for credit union activity within the third quarter, particularly in the areas of total revenue growth and low share growth, said Chip Filson, president/CEO of Callahan & Associates, Inc. during a December Webinar. Total revenue has been positive for the last five quarters and operating expenses continued to "chug along," Filson said. The operating expense ratio has risen almost 15% since Sept. 2001. The industry is also seeing the lowest share growth since December 2000 largely due to hardly any movement from credit unions on their rates. Indeed, in the call reports as of Sept. 30, money market rates have only gone up five basis points. "Only 30% of credit unions that offer money market funds have moved up from the June 30 level and 10% moved down," Filson said. "Regular shares have seen no change in the rates being paid," adding that "members may be a little more rate sensitive" than they've been in recent times. For the first time in two years, top of the line revenue is positive as the "rise in interest rates starts to kick in," Filson said. Bottom line net income is less than what it was a year ago as return on assets (ROA) continued to see slow quarter increases since that indicator bottomed out at 82 basis points in December 2003. To date, ROA is 95 basis points. There's also been "little or no movement" in yield indicators for credit unions. Yields on loans continue to fall but loan growth has outstripped share growth in every quarter. Compared to banks and thrifts, credit unions rank last in asset growth, ROA and net interest margin. Filson said the loan to share category "is probably not a fair indicator because banks use a lot of wholesale funding." One area of concern is net membership growth is the lowest it's been going back five or six years with half of the nation's credit unions reporting a net loss of members since Sept, 30, 2003, Filson said. During the Webinar, the $260 million Cal State #9 Credit Union was highlighted for the success it's having with its home equity lending program. Since December 2003, ROA has increased 100 basis points and loan to share has gone up, said Jackie Wong, president/CEO. Delinquencies have gone down 40 basis points as a result of the home equity program. Operating expenses were also lowered by 60 basis points. "We purposely dried up our overnight liquidity for the past two years and it has paid off with our investment yields," Wong said. David Trinder, vice president, balance sheet management at WesCorp, provided a number of reasons why credit unions are borrowing more and what they are using the funds for. Among the reasons is being able to managing risk, which is increasingly coming from loan participations. In the short term, credit unions are also looking to replace share outflows or excess loan growths, he added. "Borrowing doesn't reflect what credit unions need for liquidity purposes or the choices available," Trinder said. Among its credit union members, WesCorp has noticed increased activity in indirect auto lending and within the one to three-year sector. John Olivo, portfolio manager at Goldman Sachs, provided a forecast of the nation's economy for 2005 and what the Federal Reserve Board might do at its next meeting this month. The Gross Domestic Product (GDP) indicator is expected to grow due to easier financial conditions in the marketplace, lower oil prices, more jobs and leaner inventories. Olivo said Goldman Sachs still expects the Fed's outlook might be a tightening of 25 basis points per meeting "unless the Fed Fund rate gets closer to a more neutral rate." The federal budget deficit at $350 billion is "relatively good" and "is much smaller than expected." "Some might think we're headed towards what we saw in the 1990s when the deficit turned into surplus," Olivo said. "But defense spending, the Medicare benefit which kicks in during 2006, and Baby Boomers retiring could see that revenue source decline." -