However, credit unions do have a powerful advantage over banks: their mission of helping people over profit.

In difficult economic times, it is especially important for credit unions to deliver this message to those who need to hear it. In good times, most Americans see banks and credit unions as synonymous providers of financial services. It is in times of struggle that credit unions truly earn their charter.

EARNINGS MODEL: CREDIT UNIONS VERSUS BANKS
FOR U.S. CREDIT UNIONS AND BANKS | YTD THROUGH 06.30.2024, ANNUALIZED
© Callahan & Associates | CreditUnions.com

As a percent of assets, the interest income of credit unions is 35 basis points lower than their banking counterparts — 4.93% versus 5.28%, respectively. With their cooperative structure and members-first mission, credit unions often offer lower interest rates. On the other side of the business model, banks are allowed to invest in riskier securities than most credit unions, which can have an impact (good and bad) on interest revenue.

What might be surprising is that credit unions report a lower interest expense than banks, implying a lower dividend rate for savers. This is often related to liquidity needs and margin pressures. Banks borrow more than credit unions do, which usually leads to higher interest expenses in ways that don’t directly benefit the customer. Still, for margin management in a competitive deposit environment, many credit unions are clearly focusing on controlling interest expenses.

Combining the two points above, the credit union net interest margin at midyear was 3.05%, 16 basis points higher than banks, with the difference coming from savings on the expense side.

Credit unions typically earn less in non-interest income compared to banks. Banks tend to be far more diversified in their revenue streams and have more lenient regulation around certain investing strategies and supplemental business models. Fees, also, are important here. Credit unions rely more on NSF/OD fees than banks on a per dollar basis. However, credit union balance sheets are largely dominated by personal accounts, whereas banks are predominantly funded by large corporations that are less likely to run up frequent transactional fees.

EARNINGS MODEL: CREDIT UNIONS VERSUS BANKS
FOR U.S. CREDIT UNIONS AND BANKS | YTD THROUGH 06.30.2024, ANNUALIZED
© Callahan & Associates | CreditUnions.com

When it comes to operating expenses, credit unions’ 2.98% ratio is 51-basis-points higher than banks; not surprising given credit unions’ smaller size and scale and focus on local service. Inflation has underpinned a rise in operating expenses the past few years, and many credit unions are looking for ways to improve efficiencies, including through tactical partnerships with specialized vendors.

Given their smaller average asset size and close connection to members, credit unions must be diligent in defining — and sticking to — an asset quality strategy. As credit unions often serve lower income households — a demographic many banks would look to dilute on their balance sheet or avoid outright —  they set aside a greater percentage of loan loss provisions to average assets than their banking counterparts. As of midyear, that was 0.57% versus 0.16%, respectively. The PLL expense allows credit unions to reach underserved members while still protecting the stability of the overall membership.

Taking all these metrics into account, banks still make significantly more in profits compared to credit unions, even after their tax hit. The ROA of credit unions was 46 basis points lower than banks at midyear. Instead of padding the pocketbooks of shareholders with those returns, however, credit unions instead direct their earnings toward lower loan rates, greater allowances for lending, and stronger member service.

How Does Your Midyear Performance Compare? Sit down with a Callahan advisor to review your tailored performance packet, and we’ll show you how your credit union measures up against others. Armed with this knowledge, your leadership team can make better plans and set stronger goals for 2025 and beyond. What are you waiting for? Request Your Packet Today.

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• According to the U.S. Chamber of Commerce, employers added 3.1 million jobs in 2023. Although a robust job market helped fill many of these job vacancies, a shortage of workers means many positions remain unfilled. Despite having more Americans in the workforce today than before the pandemic, the overall labor force participation rate has declined.
• Industry membership has grown at a compounded annual rate of 3.5% during the past five years, outpacing employee growth of 2.6%. As a result, credit union leadership and employees have had to leverage the power of purpose and technological efficiencies to provide the same level of service .
• In the past five years, assets per employee have increased by a compounded rate of 5.8% and reached $6.6 million as of March 31, 2024. In the wake of higher loan and investment yields, income per employee reached $389,785. These numbers suggest credit union employees have been able to handle the influx of members, allowing credit unions to bring in more income.

Don’t Wait For Data! Member service representatives serve more members today than they did five years ago — they also earn more for the credit union. Callahan’s online performance benchmarking tool provides an early look at quarterly performance results, giving leaders crucial insight weeks before the official data release from the NCUA. Don’t wait for data; contact Callahan today. Start your analysis now.

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CREDIT UNION REBRANDS
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.24
© Callahan & Associates | CreditUnions.com

• Credit union name changes occurring outside of a merger have declined slightly since the pandemic. In 2019, 1.51% of all credit unions nationwide underwent a name change. During the pandemic, that percentage dropped to 0.94% and has continued to drop to 0.91% as of Dec. 31, 2023.
• Perhaps not surprisingly given the economic environment, marketing growth bottomed out at -8.8% in the fourth quarter of 2020. It then peaked at 22.3% in the first quarter of 2022. Since then, however, marketing growth has gradually declined, dropping to 0.3% in the first quarter of the year.
• Although growth has dropped, credit unions are not shying away from marketing. Marketing per member increased from $15 at year-end 2019 to $17 as of the first quarter of 2024.

What Does Performance Data Say About Your Marketing Strategy? Dig into key marketing metrics like marketing expense per member, share draft penetration, average member relationship, and more to uncover new areas of opportunity and make informed strategic decisions. How do you compare to peers? What can you do better? Request a free performance packet today.

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MEMBER GROWTH AND REVENUE PER MEMBER
FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.24
© Callahan & Associates | CreditUnions.com

How Does Your Growth Strategy Compare? Use industry data to dig into credit union performance, uncover new areas of opportunity, and support strategic initiatives. Would you like to see how your growth compares to peers? Callahan’s credit union advisors are ready to show you. Request your complimentary performance analysis today.

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What factors are driving these changes? What are the implications for the future? Click the tabs at the top of each graph for additional trendlines and context.

Liquidity On Your Mind? Request Your Performance Scorecard. Don’t let liquidity concerns disrupt your plans for success. Let Callahan & Associates set you up with a free liquidity packet, empowering your credit union to confidently navigate financial challenges. Request Your Scorecard Now.

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MEDIAN HOME PRICE TO MEDIAN INCOME
FOR U.S. CENSUS DATA | DATA AS OF DECEMBER 2024
© Callahan & Associates | CreditUnions.com

Is Your Mortgage Strategy Top Of Mind? Use industry data to dig into credit union performance, uncover new areas of opportunity, and support strategic initiatives. Want to see how you compare to peers? Callahan’s credit union advisors are ready to show you. Request Your Free Mortgage Scorecard Today!

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UNBANKED RATE AND OVERDRAFT FEES BY INCOME
FOR FED SURVEY RESPONDENTS | DATA COLLECTED 10.21.22-11.01.22

• Seventeen percent of individuals who earn less than $25,000 annually are unbanked, according to data gathered from the Fed’s Survey of Household Economics and Decisionmaking (SHED). Sixteen percent of this group paid an overdraft fee in the 12 months prior to the survey. By contrast, fewer than 0.5% of those who make more than $100,000 are unbanked, and only 6% paid an overdraft fee.
• Age, ethnicity, and disability play a significant role in economic wellbeing. Younger individuals are more likely to be unbanked or overdrafted. African Americans and Latinos also are more likely to be unbanked or overdrafted. Lastly, those with disabilities are twice as likely as non-disabled Americans to report being unbanked.
• Banking deserts, areas that lack a nearby banking facility, also put economic wellbeing at risk. The distances that constitute a banking desert vary — two miles for urban areas, five miles for suburban areas, and 10 miles for rural areas — but according to 2023 data released by FedCommunities, banking deserts were present in 4% of U.S. census tracts with another 4% at risk if branches close. Among these, 66% are suburban, 14% rural, and 20% urban, with 39% lacking home internet. Additionally, the majority or residents in 15% of deserts and 17% of at-risk areas are African American, Hispanic, or Indigenous residents.
• Marginalized communities remain largely unbanked or underserved. Proactive steps taken by credit unions — such as providing comprehensive services and actively promoting financial education — could bolster financial inclusivity and enhance the financial wellbeing of these communities.

The post Where Are The Gaps In Financial Inclusion? appeared first on CreditUnions.com.

OPPORTUNITY TO LEARN AND GROW AT WORK
ALL U.S. WORKERS| DATA AS OF 2024
© Callahan & Associates | CreditUnions.com

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These factors, along with the increased cost of doing business, played a major role in the industry’s earning model.

CREDIT UNION EARNINGS MODEL
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.23
© Callahan & Associates | CreditUnions.com

1. Interest income and expense increased thanks to the rise in the federal funds rate. Higher rates on loans resulted in a notable upswing in interest income outstanding. It increased a full percentage point year-over-year to 4.43%.
2. This boost in interest income came alongside heightened interest expenses, which increased 90 basis points annually to 1.42%. The increased federal funds rate amplified the cost of funds for credit unions, which affected different asset sizes differently. Larger credit unions encountered higher borrowing costs compared to their smaller counterparts, who could sustain their lending operations primarily from shares. Consequently, the average cost of funds for credit unions exceeding $500 million in assets stood at 1.69% of adjusted shares at year-end; for those with less than $500 million in assets, it was only 0.97%.
3. Considering both interest income and expense, the net interest margin for credit unions in 2023 reached 3.01% — an annual increase of 15 basis points.
4. Non-interest income as a percentage of average assets held steady at 1.13% in 2023. Overdraft and loan repayment fees played a notable role in this income as members opted to make late loan payments or pay a fee to defer payments. With non-interest income stagnant, credit unions heavily relied on lending to generate revenue.

Want more insight about non-interest income? Tap into a universe of non-public data with Callahan & Associates. Reach out today to learn more.

5.  As the cost of doing business continued to rise in response to inflation, the operating expense ratio increased 10 basis points. It accounted for 2.95% of average assets as of Dec. 31.
6. In response to rising delinquency, credit unions increased loan loss provisions by 26 basis points. By year-end, the percentage of provision expense to average assets was 51 basis points.
7. Given the changes in the overall earnings model, return on assets declined 20 basis points year-over-year.

Credit union performance data for this article comes from Callahan’s quarterly Trendwatch webinar, which includes Call Report data from 99% of all industry assets. Watch Trendwatch 2023 today on-demand.

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LOAN GROWTH, MEAN VS. MEDIAN
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.23
© Callahan & Associates | CreditUnions.com

• Delinquency remained a focal point throughout 2023, particularly as consumer budgets tightened in the face of inflationary pressures. For the fourth consecutive quarter, delinquency ticked up and reached 0.83% at year-end. However, delinquency rates have varied significantly across different lending categories. Notably, credit card and auto loans surpassed the overall delinquency rate at 2.11% and 0.90%, respectively.
• Bolstering loan loss provisions helps credit unions prepare for downturns in borrower repayment and mitigates the risk of further delinquency. So far, that’s exactly what cooperatives have done. Loan loss provisions accounted for 0.51% of average assets as of Dec. 31, double what it was last year.
• Looking ahead, anticipated rate cuts in the first half of the year might herald the next shift in lending. Such cuts could stimulate lending activity and reignite consumer interest in borrowing. In the interim, it’s worth noting that current delinquency levels are still below historic highs. Credit unions are exercising due diligence in addressing this issue and effectively providing for it.

Credit union performance data for this article comes from Callahan’s quarterly Trendwatch webinar, which includes Call Report data from 99% of all industry assets. Watch Trendwatch 2023 today on-demand.

The post High Rates + Costly Assets = Slow Lending appeared first on CreditUnions.com.