Among all credit unions in the United States, nearly all larger institutions participate in first mortgage lending; in smaller peer groups, few do so. The $20 million to $50 million peer group offers a good mix of business models to evaluate whether smaller credit unions that grant first mortgages perform differently in terms of financial performance and member value.
Approximately two-thirds of credit unions with assets from $20 million to $50 million granted a first mortgage loan during the first nine months of 2011. Some institutions of this size work with credit union service organizations (CUSOs) to provide mortgages. This activity is not recorded on the 5300, and therefore is not included in this analysis. In addition, first mortgage lending activity must indicate a consistent trend as opposed to a single year. The peer group analysis compares these two groups of credit unions:
- Credit unions that grant first mortgages — These credit unions have an asset base of $20 million to $50 million and granted a first mortgage loan in 2007, 2010, and 2011. There are 617 credit unions that meet these criteria.
- Credit unions that do not grant first mortgages — These credit unions have an asset base of $20 million to $50 million and did not grant a first mortgage loan in 2007, 2010, or 2011. There are 321 credit unions that meet these criteria.
Click on graph to view larger size. | Source: Callahan & Associates' Peer-to-Peer
Credit unions that grant first mortgages have stronger member relationships and higher revenue per member; they also have higher operating expenses.
Credit unions that do not grant first mortgages have slightly lower delinquency, lower operating expenses, and higher share growth.
Other highlights include:
- Credit unions that grant first mortgages hold more real estate assets in their loan portfolio. As of September 30, first mortgages comprise 37.3% of the loan portfolio, other real estate loans comprise 11.8%, and auto loans comprise 33.2%.
- Credit unions that do not offer first mortgages hold the majority of the aggregate loan portfolio (52.2%) in auto loans.
- Credit unions offering first mortgages hold a significantly higher loan-to-share ratio (63.5%) compared to their asset-based peers (49.3%).
- In a low-interest rate environment, holding earning assets helps insure continued income. Driven by both interest income and non-interest income, then, credit unions that offer first mortgages report higher revenue per member. Higher operating expenses, however, erases these gains. Salary and benefits costs pushes up operating expenses in credit unions that grant first mortgages. Although posting a lower per FTE salary and benefits cost, these credit unions employed 12 FTEs on average, compared to nine FTEs in the other group.
- Asset quality is a wash. Delinquency is slightly higher at credit unions that grant first mortgages, but the net charge-off ratio is lower. This could indicate these institutions hold some amount of modified mortgages, which could inflate delinquency figures.
- Member growth declined in both groups but is slightly better at non-first mortgage granting institutions, although these institutions do have a more severe loss in outstanding loans.
- Credit unions that grant first mortgage post higher mortgage balances and stronger member relationships. Share draft penetration, or the percentage of members with a checking account, is six percentage points higher at credit unions that offer first mortgages.
- Both groups hold similar capital levels.
Peer Group Summary
Providing member value while safely operating and growing the credit union is a primary concern for all credit union managers. Mortgage lending attracts and serves members and helps cement strong, long-term member relations; however, it carries increased risk. Credit unions must have strong underwriting practices, be aware of ALM best practices, and implement strategies to mitigate or minimize interest rate risk.