Mergers Continue to be a Concern

(May 16, 2007 - New York, NY)  The National Federation of Community Development Credit Unions (the Federation) has just completed its semiannual report, Financial Trends in Community Development Credit Unions: A Statistical Analysis, which quantifies and analyzes the aggregate performance of its 219 member community development credit unions (CDCUs) at fiscal year-end 2006.

The CDCU sector continued to experience rapid expansion in 2006 while also showing significant improvements in financial performance. CDCUs maintained greater rates of growth in membership, assets, loans, shares, and net worth than federally insured credit unions (FICUs) as a whole.  Membership growth is especially notable: CDCUs continued to substantially outpace the mainstream, increasing their membership by more than three times the FICU rate (4.98% against 1.48%).  Membership growth in 2006 was the only CDCU growth rate that outpaced last year’s performance (membership grew by 4.51% in 2005).
 
Perhaps even more striking was the significant improvement in all vital CDCU performance ratios. Especially notable was a sharp increase in profitability, from 0.65% to 0.84%, in contrast to a 0.03% decline for FICUs overall.  At the same time, delinquency and charge-off rates decreased: delinquency dropped from 1.85% to 1.83%, and charge-offs from 0.87% to 0.78%.  Also notable were improvements in the net worth and loan-to-share ratios.  In addition, there was a steep decline in member bankruptcies from 0.35% to 0.15% of total membership and a drop of 57% in outstanding loans subject to bankruptcy.  These dramatic declines are mirrored by mainstream FICU data and are probably the result of newly introduced bankruptcy laws. 

Continued growth and improvements in financial soundness should help Community Development Credit Unions make further progress toward mainstream performance standards in traditionally challenging areas such as net worth, delinquency, and charge-offs, despite operating in difficult low-income, low-capital environments.  However, sustaining growth momentum, while also maintaining strong performance ratios, will be a major challenge going forward.  Though net worth, loans, and assets all grew significantly, the pace of growth was down from last year. Decline in the asset growth rate was the most pronounced, falling from 12% to 5%.

One area of concern is high operating expenses: CDCU operating expenses are historically around 1.5% to 2% higher than the mainstream’s, partly because distressed communities require additional services, especially financial literacy support and training.  In 2006, operating expenses increased by 0.10%, to 5.06% (compared to 3.31% for all FICUs).

Another ongoing challenge is the frequency of CDCU mergers. CDCUs continued to merge at a higher rate than FICUs.  In 2006 ten CDCUs were merged, 4.63% of the total – the FICU merger rate was 1.48%.  The higher CDCU rate can be explained by the fact that smaller credit unions are more likely to merge, and the median CDCU is substantially smaller than the median FICU.  In fact, the merger rate for FICUs in the same size category as CDCUs has been roughly the same.

To view the full report, please click here.

© 2007 National Federation of Community Development Credit Unions.