An Uneven Recovery

The state of the CU movement is vastly improved, but not all CUs are seeing the same results.

January 6, 2014

Credit unions have posted impressive operating results as of late: Membership growth is at decade-long highs, earnings are approaching near-normal levels, and asset quality has improved dramatically.

In the aggregate, operating results today look nearly as good as pre-recession levels. But the journey back to “normal” has been painfully slow and uneven. Not all credit unions are experiencing the same recovery. The differences become apparent when you take a closer look at credit unions by location, field of membership, and, in particular, asset size.

Stronger growth—for some

Credit union membership growth has rebounded in a big way recently. Bad behavior in the banking sector helped inflate the housing bubble, which set in motion the subsequent global economic collapse.

Those banker misdeeds, combined with more recent anti-consumer pricing schemes, spawned a consumer backlash that included Bank Transfer Day and other follow-up activities. Credit unions were the primary beneficiaries of all this.

Member-owned credit unions didn’t contribute to the bubble, and during the worst of the recession, credit unions received positive reviews for their pro-consumer lending practices, willingness to lend, and readiness to go the extra mile to meet members’ needs.

This has resulted in aggregate membership growth of 2.1% in 2012 and a similar rate for the year ending June 2013. These membership growth rates are more than double that of the U.S. population.

Small CUs

But this rising tide isn’t lifting all ships. The smallest credit unions—those with less than $5 million in assets—experienced a 2.2% decline in membership for the year ending June 2013.

Only credit unions with more than $100 million in assets posted significant membership gains during that period.


It should be noted that these asset categories are roughly equal to quartiles in the credit union movement:

An inability to attract and retain members is a source of deep concern. Membership growth is a key measure of credit union relevance in the marketplace. It’s also a measure of members’ economic health, both in credit unions’ sponsor groups and in local communities.

Declining relevance is especially difficult to battle because consumers are placing heavier demands on financial service providers. The services consumers want are increasingly complex and expensive to build (or acquire), maintain, and keep in compliance.

Disparities in membership growth between large and small credit unions can be seen in other areas as well.

NEXT: Loan & savings growth

Loan & savings growth

A stronger job market, decent consumer income gains, and low market interest rates have produced massive mortgage refinancings. These trends have also released enormous pent-up demand for 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 over 2011. They’re on pace to hit a record of nearly $360 billion for 2013—up almost 10% over 2012 results.

Loan portfolio growth has been less than spectacular because credit unions are selling long-term fixedrate mortgage originations into the secondary market to offload interest-rate risk. But last year’s 4.8% loan portfolio growth rate was the strongest since 2008, and the 5.5% pace for the 12 months ending June 2013 shows continuing strength in credit union lending.

Just as with membership growth, small credit unions aren’t taking part in the overall resurgence in lending. In fact, credit unions with less than $5 million in assets had a nearly 1% decline in loan portfolio balances for the year ending June 2013. Those with $5 million to $20 million in assets posted an increase of only 0.8% during the same period.

One reason for small credit unions’ lack of loan growth is that they’re substantially less likely than their larger counterparts to offer first mortgages. While nearly all credit unions with more than $20 million in assets offer first mortgages, only 10% of those with less than $5 million in assets do so. Less than half (47%) of credit unions with $5 million to $20 million in assets offer mortgages.

On the other side of the balance sheet, credit union savings growth hit a cyclical high of more than 10% in 2009 as economic dislocation and uncertainty triggered a massive flight to safety. More recently, overall savings growth declined below long-run norms as market interest rates hit historical lows and equity markets posted big gains.

Still, as a group, larger credit unions are growing their savings portfolios while small credit unions have experienced declines in their savings portfolios.

Earnings & challenges

Overall, 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 return on assets (ROA) up from a cyclical low of 0.18% in 2009 to 0.5% in 2010, 0.68% in 2011, and 0.84% both in 2012 and in the first half of 2013, annualized (“CU earnings”).

Small credit union earnings have improved over the cycle but are appallingly low compared with those of larger credit unions. While some might argue that low earnings benefit members, the data make it clear that many credit unions now are not earning at rates that would support capital growth in the face of asset increases.

The smallest credit unions are earning at only breakeven rates. At the other end of the spectrum, however, credit unions with more than $100 million in assets are nearly back to normal earnings levels, with average ROA of 0.91% (annualized) during the first six months of 2013.

Looking deeper, it’s easy to see why. Although small credit unions tend to have relatively high net-interest margins, they’re generally reluctant to increase fees and are less able to offer feebased services. They also have lower economies of scale and fewer resources available to pursue delinquent borrowers.

All of this translates to relatively low fee income, high operating expenses, and higher loan loss provisions.

Asset group averages can be misleading, however. Small size doesn’t necessarily mean low growth and low earnings. And, conversely, not all larger credit unions have strong loan growth and earnings.

In fact, hundreds of small credit unions exceed movement norms in membership growth, loan growth, and bottom-line results. While larger credit unions are more likely to exceed those norms, some larger credit unions wrestle with the same challenges facing smaller credit unions.

Surprisingly, more than half of credit unions with more than $100 million in assets did not meet the national average for membership or loan growth (“CUs exceeding national norms”). And more than two-thirds of credit unions in that asset group didn’t record ROA as high as the 0.84% first-half national average.

Managers of small credit unions will tell you their operating challenges are significant and complex, and consolidation pressures will continue. There are no silver bullets nor magic formulas. Each credit union’s solution is as unique as the credit union itself.

And many of those same credit union professionals are quick to point out that a variety of initiatives—new strategic alliances, collaboration efforts, more-focused niche strategies, and regulatory relief efforts—are having a positive impact.

They’ll also tell you that while they’re not always obvious in group averages and statistical reports, inspirational success stories are there. And, more importantly, they’re being replicated throughout the movement.