Second Quarter Trendwatch Highlights Factors Affecting Share Growth

Focusing on growth issues and the expansion of branch networking, the Callahan Second Quarter Trendwatch Report highlighted the financial state of credit unions as of June 30, 2004.


Credit unions are competing in a rising interest rate environment, but performance remained solid through the second quarter, characterized by strong loan growth.

Top-line revenue growth still remained negative and net income fell, compared to the first six months of 2003. Total revenue declined 0.01%, with net income falling 4.14%. During the same period non-interest income grew 8.6%, offsetting the decline in net interest margin and rising operating expenses (see chart below).

Income Statement Trends
June 2004
Change from June 2003
Total Revenue
$9.25 bn
Operating Expense
$5.08 bn
Provision for Loan Loss
$543.1 mm
Non-interest income
$1.86 bn
Net Income
$1.50 bn

To dissect the meaning of these and other second quarter results for the industry at large, members of the credit union community from across the country participated in Callahan and Associates' Second Quarter Trendwatch call last week.

The Trendwatch interactive call and slide presentation covered three sections:

  • Detailed analysis of the second quarter results
  • Branch expansion strategy example
  • Economic update and outlook

Slow Share Growth Inversely Related to Investments
Hosts Chip Filson, president of Callahan, and Jay Johnson, executive vice president of Callahan, highlighted the state of credit unions as of June 30, 2004.

"Low loan and investment yields are impacting credit union income, which makes loan volume and non-interest income more critical to the credit union business model," said Johnson.

While credit unions grew their loan portfolios 11.7% over the past year, share growth was only 5.5% during the same period (see chart below).

Balance Sheet and Membership Trends
June 2004
Change from June 2003
Number of Credit Unions
$649.5 bn
$403.2 bn
$215.7 bn
$562.0 bn
$84.8 mm

Filson elaborated on the factors contributing to the slowed share growth. "There is a 180 degree correlation between credit union share accumulation and funds moving into the S & P 500 index. As funds shift into the equity markets, the credit union industry experiences a deceleration in share growth."

Other factors included stagnant membership growth and a shrinking customer satisfaction gap between credit unions and banks.

CU Combats Slowing Share Growth Through Branch Network Expansion
Expanding branch networks is one of the ways that credit unions are addressing slowing share growth and revenue challenges. Randy Halley, senior vice president of branch delivery for America First Credit Union in Utah, presented the credit union's branching strategy for the past year.

America First opened thirteen new branches since June 2003, shortly after converting to a federal charter. Eight of these are located in Wal-Mart stores. They are continuing to explore further expansion opportunities.

Economic Predictions: Yield Curve Will Continue to Flatten as Interest Rates Rise
John Olivo, portfolio manager at Goldman Sachs, indicated that Goldman is projecting the Fed Funds to increase by 75 basis points by year-end 2004 and another 125 basis points by year-end 2005.

"We expect the Fed to move as early as September with rate hikes in October and November," commented Olivo.

Though overnight rates are expected to rise, long-term rates, such as the 10-year treasury are projected to rise but not nearly at the same pace of the Fed Funds rate. In other words, the yield curve will continue to flatten through 2004 and 2005.

Callahan & Associates' Trendwatch call is held each quarter following the release of call report data. To download the full slide presentation click here.




Sept. 13, 2004



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