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A guide to reporting on credit union trends and financials

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Photo by Flickr user Thomas and Juliette Aiko

Business journalists have a wealth of new data on financial institutions to sift through as the nation’s 7,105 credit unions recently reported second-quarter financials. Reporters who review their local credit unions’ 5300 call reports will find a range of story topics in different regions of the U.S. – including stronger business lending, increased first mortgage market share and perhaps standouts in new and used auto lending.

Last year amid a grassroots furor over big bank fees, credit unions relished an opportunity to draw more new members to their smaller institutions. They promoted their lower fees and not-for-profit business structures in a variety of marketing campaigns, and it seems to have worked.

Credit unions reported nearly 3 million new members this past year as of the 2012 second quarter, according to the National Credit Union Association’s most recent credit union filings, finalized August 30.

The latest credit union industry data

Credit unions have a long way to go before they are as widespread as banks. But credit unions are financial institutions to watch as they’re claiming 7.6 percent of first mortgages, a portion of the loan portfolio that grew 5.8 percent year-over-year. They are also making significant gains in new and used auto loans and credit card lending, which in year-over-year both increased to 4.8 percent . In total, credit unions reported $156.7 billion in loan originations in the first six months of 2012.

Find the second-quarter credit union reports, called 5300 call reports, in your area on the NCUA’s website. Compare the performance of local credit unions to nationwide averages and to credit unions that have similar asset sizes.

Industry wide, business lending was the fastest growing component of credit unions’ loan portfolios in the second quarter. Banks have been focusing more on lending to larger commercial businesses and many credit unions have found a niche in making $50,000 to $100,000 to smaller – though more risky – startups. Credit unions increased total business loans 8.7 percent in the second quarter from a year prior.

Political issues to watch

As election season heats up, the credit union industry is getting more involved in their local elections. On some issues, like increased regulations, it sides with banks. On other issues, such as whether to raise the member business lending cap, it takes an opposite stance. Here are a few political issues credit unions in your area may be absorbed with:

Disclosures issues. Credit unions, like banks, will likely have to abide by new disclosure rules proposed by the Consumer Financial Protection Bureau. The new disclosures aim to be easier for the consumer to understand, but many smaller credit unions are worried about the resources it will take to comply with new regulations. Find out what credit union executives in your area are expecting. Learn how they are already explaining credit card and mortgage terms to their members and whether they will soon change.

Member business lending. In a nutshell, some credit unions are pushing Congress to raise the 12.25 percent cap on member business lending (12.25 percent of a credit union’s total assets) so that they can lend to more entrepreneurs. Bankers, however, are arguing that the cap should remain intact because credit unions enjoy a tax-exempt status. Bank executives say the higher cap would cost tax payers more and would only benefit a small number of larger credit unions that already have an edge with tax exemption. What is the sentiment among credit unions in your area?

Consumer Financial Protection Bureau regulation. Aside from the disclosures issue, credit unions are anticipating the CFPB will affect them in many ways. The bureau only has authority to review and enforce rules for institutions over $10 billion, which excludes all but four credit unions. Still, any CFPB rules can affect banks and credit unions of all sizes. The CFPB has yet to officially pass new regulation, but credit unions are on guard for what may come. What are your local credit unions expecting from the CFPB?

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Key ratios in credit union reports

Lydia Cole, an analyst with Callahan & Associates, has outlined “12 Key Ratios” for credit union board members to know to ensure a working familiarity with their balance sheets. These ratios are also exactly what journalists covering credit unions should know when reviewing the quarterly reports, called 5300 call reports. Understanding the health of the credit unions in your region in the same way executives and regulators understand it is crucial to reporting accurately and thoroughly on the credit union industry.

These key ratios are similar to what reporters covering banks need to know, but the terminology differs a bit. Here are some examples of key ratios you could apply to your local credit unions:

Loans-to-shares ratio: Shares are simply credit unions’ checking accounts. They are called shares because the members, or customers, of a credit union are also the owners. The loans-to-shares ratio measures a credit union’s liquidity. The more shares a credit union has, more it has to lend and the lower its loan-to-share ratio. Credit unions reported an average of 67.0 percent loan-to-share ratio in the second quarter, up 0.9 percent from the first quarter.

Coverage ratio: This metric tells executives how much money they have to cover loans  the credit union can’t recover. To get it, divide the allowance balance on the 5300 call report by the total reportable delinquent loans.

Net interest margin: Like banks, credit unions make money by lending, so the profit credit unions are making on their loans is important. The net interest margin is calculated by subtracting the interest paid to members from loans and investments and dividing that by the average assets.

Operating expense ratio: Reporters can use this ratio to gauge whether a credit union is operating efficiently. It’s calculated by dividing the operating expense by average assets. To calculate operating expense to income ratio, divide the operating expense by the total income. Both of these reveal how productive a credit union is. Compare these ratios from different credit unions in your area both against each other and against other similarly sized credit unions.

Average member relationship: This ratio is an important gauge to tell how involved members are as it shows how much of the credit union’s retail a credit union’s members are using. It includes shares and loans but not business loans. So, to calculate it, add total shares to total loans and subtract member business loans. Then divide by the total members.

About the Author

Rebecca L. McClay is managing editor of www.creditunions.com and a contributor to Trefis, a financial analysis website. She recently interned for MarketWatch in San Francisco and Bloomberg in New York and was previously a business writer at The Gazette of Business & Politics in Maryland. She has been published in The Arizona Republic, The Wall Street Journal, The Baltimore Sun and more. Rebecca has been contributing articles to businessjournalism.org since 2009.

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