Growth in Assets and Earnings Gives 2002 a Strong Start

Summary and analysis of first quarter 2002 performance data


Robust share growth, slow loan growth, and solid earnings were posted by the 1,717 credit unions with assets over $50 million that reported March 31, 2002 financial data. Over the past twelve months, credit unions have experienced strong balance sheet growth with assets rising 14.9%, but a dramatic change in the interest rate environment led to the first decline in total income in recent memory. Despite the decline in income, earnings rose 20.4% as credit unions lowered their cost of funds. The steep drop in interest rates has presented new challenges for credit union management, but a year after the Federal Reserve began to lower rates, credit union results remain strong and reflect the ability of these unique institutions to provide their members with competitive financial products.

Strong Share Growth Continues
The 1,717 credit unions with assets over $50 million as of March 31, 2002 posted a 5.7% three-month share growth rate in the first quarter, bringing total shares to $386.3 billion. This strong growth rate is down from the 6.3% rate the $50 million credit unions posted in first quarter 2001, which was the highest ever recorded by Callahan & Associates. As first quarter typically experiences the highest share growth rates, it is unlikely that this pace will be maintained for the remainder of 2002. However, the liquidity increase that began a year ago continues, and the loan to share ratio has now fallen to 71.2% from 74.8% one year ago. For the 12 months ending March 31, 2002, the 1,571 credit unions that reported financial data in both first quarter 2001 and first quarter 2002 experienced 15.3% share growth. Growth continues to be driven by money market and regular share accounts, which have risen 40.4% and 19.9%, respectively, in the last 12 months.

Mortgage and Auto Lending Activity Paces Loan Growth
Lending activity is off to a slow start in 2002, with outstanding loans rising 1.0% through the first three months of the year to $275.1 billion for the $50 million credit unions. Two lending categories, first mortgages and used autos, are responsible for the growth, rising 4.2% and 2.2%, respectively, in the first quarter. These categories also led the 9.9% twelve-month growth rate in total loans, with first mortgages increasing 21.2% as members took advantage of low rates for both purchases and refinancings, and used auto loans growing 14.4% in a highly competitive automobile market.

The delinquency rate for loans remains low at 0.6%, showing no increase from March 2001. Although the delinquency rate has not changed, delinquent loans have risen 21%, leading credit unions to increase the provision for loan losses by 41% versus first quarter last year. Coverage of delinquent loans remains strong as a result, with loan loss reserves totaling 134% of delinquent loans.

Investment Maturities Extended
With share growth outpacing loan growth over the past year, the investment portfolio of the $50 million credit unions has risen 23.8% to $145.9 billion. Investment maturities of one year or more accounted for 36% of the portfolio in March 2001, but credit unions have been gradually extending maturities over the last year as the desire for higher yields increases. Longer-term investments now account for 45% of total investments. Despite extending the portfolio, credit unions have experienced a sharp drop in investment yields over the past year.

Income Falls, Earnings Rise, Capital Remains Sound
Although loans and investments both realized solid balance sheet growth in the last year, loan interest income is flat in the first quarter of 2002 versus the same period last year while investment income is down 16.1%. Credit unions saw loan yields fall 70 basis points to 7.7% and investment yields drop 200 basis points to 3.6% over the past 12 months. Because of the low interest rate environment, fee and other non-interest income is becoming more important to many credit unions, rising 11.6% from first quarter 2001 results and now accounting for 13.9% of income versus 12.2%. Even with the rise in fee income, total income in first quarter 2002 fell 1.5% versus first quarter 2001.

While operating expenses have risen 11% over the first three months of 2001, primarily due to increases in employee compensation, credit unions effectively managed their cost of funds in order to maintain strong earnings. The average cost of funds has declined 120 basis points since first quarter 2001 to 3.0%. Credit unions are still paying competitive rates to members on their deposits, which is reflected in their high share growth rate, and their successful rate management helped them post a strong 1.07% annualized return on assets in the first quarter, up from 1.04% in first quarter 2001. The strong earnings have allowed credit unions to maintain their solid capital base, as net worth to assets stood at 10.2% as of March, down only slightly from the 10.7% posted in first quarter last year despite strong asset growth over the past 12 months.




June 10, 2002



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