Credit Unions Keep themselves, and their Members, Financially Afloat

The low interest rate environment of the last twelve months has led credit unions to dramatically lower their payout ratio, the amount of income paid out as dividends. As share accounts, primarily short-term, grew, credit unions dropped the dividends paid on these accounts to make up for declining yield on investments and loans.

 
 

The low interest rate environment of the last twelve months has led credit unions to dramatically lower their payout ratio, the amount of income paid out as dividends. As share accounts, primarily short-term, grew, credit unions dropped the dividends paid on these accounts to make up for declining yield on investments and loans.

Total income, the “top line,” of the 1,585 credit unions that reported in third quarter of 2002 and 2001 declined 0.48%, or $124 million, in a year to date comparison. During those same nine months, operating expenses grew 11.59%, or $1.1 billion. These two factors mean that credit unions had to make up $1.2 billion on their bottom line. Credit unions responded by decreasing dividends paid by $2.4 billion. This decreased the payout ratio from 43.5% at September 2001 to 33.4% one year later. The change helped these credit unions increase their ROA 16 basis points, from 1.01% to 1.17%. This gain in the rate of net income was essential for credit unions to maintain a net worth to asset ratio of 10.37%, only slightly down from 10.49% a year ago.

Of course the downside of this fall in dividends is that members receive less on their share accounts. Still, credit unions have been able to pay members better rates than other financial institutions. According to the FDIC, banks dropped their payout ratio from 35.8% to 23.4% during the last twelve months. This 34.6% decline in payout ratio is much greater than the 23.2% decrease among credit unions.

While credit unions have been forced to drop rates, they have been able to maintain their member value by returning more than other financial institutions. DataTrac Corp reported that credit unions’ average rates are 1.39% for regular shares, 0.84% for share draft accounts and 1.58% for money market accounts. All of which beat banks by around 50 basis points as their accounts returned 0.83%, 0.56% and 0.9% respectively. DataTrac follows rates for more than 8,000 depository institutions, including 1,000 credit unions. The graph below shows the distribution of money market rates paid in the third quarter of 2002 to those 1,429 over $50 million that offer money market accounts.

 

 

 

Dec. 9, 2002


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