How Credit Unions Losing Money Can Help Stronger Performers

In every group of firms, some will do better than others. Credit unions are no exception. While it is customary to look at the top of the chart for "best practices," insight can also be gained by examining the lower end of the performance ladder.

 
 

In every group of firms, some will do better than others. Credit unions are no exception. While it is customary to look at the top of the chart for ''best practices,'' insight can also be gained by examining the lower end of the performance ladder.

At June 2002, 1,503 credit unions with $13.5 billion in assets reported a collective loss or negative ROA of 1.1% for the first half of the year. Most of the credit unions were small. The average size was $ 9 million with 2,180 members and five employees. One year ago this same group reported a positive bottom line of .3% for the first six months of 2001.

The factors causing the losses in this group can provide some insight as to the issues larger credit unions may face. There were three primary reasons for the falloff in net income from positive to negative in the 12 months between the two reporting dates:

  1. Operating expenses rose much faster than total income. For the group revenue for the first six months fell 11.6%; however total expenses
    rose 11.9%. The result is that the operating expense to income ratio rose from 51% to 65% in one year. The data suggests the credit union were aware of their dilemma since travel and conference expenses declined 16.9% and total salaries only rose 5% compared the industry average of 10%.

  2. The net interest margin fell by 41 basis points from 4.69% to 4.28%. Two major factors caused the decline. Total loans fell by 2.4% versus an 8% gain for all credit unions. Investments grew 24% or the same as in all credit unions but the return in terms of dollars fell by over 31%. Most small credit unions keep their investment portfolios very short. At June 30 only 25% was over one year versus 45% for all credit unions. The yield on investments fell from 5.2% to 2.4% which was a return lower than these credit unions cost of funds- 2.6%- for the first six months of 2002.

  3. Finally the credit unions had some modest deterioration in the loan portfolio. Net charge offs rose by 60% and the provision expense increased 94%.

The impact of all these forces on the average income statement of this group of 1,503 was as follows:

Total bottom line decline: $61,000

 

 

 

Oct. 21, 2002


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  • Interesting but makes you wonder what they're going to do to fix it. That's the story we could learn from...
    Anonymous