While the 2022 calendar has turned, we do not yet know the full results for the credit union system. And how member returns may have ended up.
The number one economic topic in 2022 was inflation. In response the Fed raised short term rates from 0-.25& to 4.25-4.50% in seven steps. The rest of the yield curve rose although not always in a parallel fashion. In some time periods, the yield curve has inverted meaning short term returns exceed longer maturities.
Credit unions fund on the short end of the curve. Liquidity was, and still is, a top credit union priority. At September 30, annual loan growth was 19.4% versus share growth of just 6.5%. Unrealized investment losses had grown to $40 billion, Total investments had fallen by over $100 billion. FHLB borrowings were double the amount versus a year earlier.
So how did credit union member owners fare overall in this rising rate environment? For the entire industry the year-to-date results through September show loan yields have risen, cost of funds has fallen by 2 basis points, and the net interest margin has increased by almost 20 basis points. Rising loan demand was the primary reason for this margin increase.
The Top 100 Report a $51 Million Decline in Dividends Paid
A commonly accepted truism in credit unions is that the larger the credit union, the greater the possible member value.
In 2022 Vanguard’s federal money market fund had a total return 1.55% rising from .01% in Q 1 to a 3.99% distribution at December 31, 2022. These savers returns rose as did market rates.
For members of the top 100 credit unions there was a very different outcome. In 63 of the largest credit unions the total dividend dollars fell by an average of 12%. The total decline was $241.7 million versus the amount paid in the first three quarters of 2021. For some the fall in rate was precipitous. One credit union reduced total dividends by 46.3%; three credit unions reduced their dividends by over 30% versus the year earlier.
In contrast, thirty seven of the top 100 reported an average 21.7% increase in paid dividends. One caveat: approximately seven of these increases were due to mergers or bank purchases which increased total shares by this externally acquired growth. Their dividend payments may not be an apples-to-apples comparison. However, ten credit unions in this group, all with only organic growth, reported over 20% increases in dividend payments.
When adding up the total dividends paid by the 100 largest credit unions through September, the combined result is a $51.2 million decline in member income on their savings.
The proviso: The game is still has one quarter to go. Some credit unions pay significant yearend bonus dividends and /or interest rebates. These will need to be added in the final quarter. With full year data we can also estimate the average dividend rates to compare with alternatives during the year.
The Existential Question for Credit Unions
In the first three quarters of 2022, members are paying more for loans, credit unions are earning higher investment returns, salaries and benefits continue to grow, and total capital has increased. However, many members are seeing a reduction in the dollars paid on their savings.
I will revisit these top 100 to see the full game’s results at December 31. Did member-owners win or lose in this rising rate environment? Which credit unions navigated this rate transition most effectively for their savers? How did they do it?
Will members continue to “subsidize” the largest coops, many with increasingly public visibility, by accepting falling returns on savings? One money market fund today pays 4.25% (seven day SEC yield) with an expense ratio of only .10 basis points. Will large shareholders start to move funds from their lower paying credit union money market products?
CEO’s frequently assert that member loyalty lasts for only 25 basis points. The US economy has had historically low rates since 2009. Lower inflation and the Fed’s “quantitative easing” have led to an unusual financial period where the cost of money was at or near zero. Can credit unions avoid the “bubbles” created by this historically rare very low-rate environment?
Will CEO’s adjust their business models so that member savers can be winners in 2023? So far the data show there is a significant gap for coop owners to receive the results they will increasingly expect versus other options.
In 2023 will the largest 100 turn into leaders, or the majority continue as laggards in savings returns?
If many of these largest firms cannot remain competitive for savers, is the cooperative financial model at risk?
Or do these falling returns, just reflect management slowness in responding to the changed interest rate situation?