Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Merchant account wikipedia , lookup
Federal takeover of Fannie Mae and Freddie Mac wikipedia , lookup
United States housing bubble wikipedia , lookup
Financialization wikipedia , lookup
Credit card interest wikipedia , lookup
Syndicated loan wikipedia , lookup
Credit bureau wikipedia , lookup
Interest rate ceiling wikipedia , lookup
Securitization wikipedia , lookup
October 1984 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis What Distinguishes Larger and More Efficient Credit Unions? William N. Cox and Pamela V. Whigham An Atlanta Fed study shows that the most efficient of Georgia's 53 largest credit unions pass along benefits of their efficiency to the customer, rely less on sen/ice charge income, have a lower proportion of loans in their asset portfolios, and run twice as efficiently as the state's other big credit unions. Credit unions are increasingly visible in t h e n e w fabric of t h e financial services industry. In years past t h e typical credit union, w h o s e m e m b e r s h i p shared a c o m m o n b o n d such as place of w o r k or residence, was small, l i m i t e d to passbook savings accounts and short-maturity consumer loans, and run by volunteers or partt i m e staffers f r o m t h e sponsoring organization. But some credit unions today are loosening restraints o n m e m b e r s and are b e c o m i n g fullservice financial institutions offering c h e c k i n g accounts, a u t o m a t i c teller machines, mortgage loans, savings certificates, retirement accounts, and even credit cards a n d safe d e p o s i t boxes. A l t h o u g h full-service credit unions still t e n d t o be small c o m p a r e d w i t h c o m m u n i t y banks or w i t h savings and loan associations m o v i n g i n t o t h e c o m m u n i t y b a n k i n g market, t h e newstyle credit unions are o f t e n large e n o u g h t o c o m p e t e for business w i t h i n t h e b o u n d s of their m e m b e r s h i p groups. This transformation has been taking place for t w o reasons. First, deregulation, w h i c h has o c c u r r e d in t a n d e m w i t h or even ahead of market changes in t h e financial services industry, has been t h e principal reason for credit unions' n e w energy a n d aggressiveness. W i t h the relaxation of many of their regulatory limitations, credit unions t o d a y can offer c h e c k i n g accounts (share drafts), l o n g e r - m a t u r i t y loans, a n d o t h e r p r o d u c t s d e m a n d e d by full-service customers. The authors Department. are members of the Atlanta Fed's Research 34 O C T O B E R 1 9 8 4 , E C O N O M I C REVIEW October 1984 Second, t h e n e w b r e e d of credit u n i o n manager w h o has pushed for deregulation tends t o be younger, t o have formal training in finance or economics, and t o v i e w the j o b in t h e same way as t h e manager of a bank or S&L branch. Some, in fact come from a bank branch managem e n t background. They see themselves as professionals w h o s e j o b is t o help their institutions grow a n d e x t e n d additional services t o customers. Because increased c o m p e n s a t i o n for t h e manager o f t e n is constrained by regulations that limit credit union growth, this m o r e aggressive group of executives has pushed for regulatory relaxation, t o satisfy b o t h their o w n d e m a n d s a n d those of their members. M o s t of t h e nation's roughly 20,000 credit unions still fit the traditional mold, but the non-, traditional credit unions are t h e ones setting t h e pace, trying t o b e c o m e full-fledged participants in the retail side of t h e financial services industry. Looking at t h e 53 largest credit unions a m o n g t h e 435 total in Georgia, w e a p p l i e d an analysis of operating ratios t o see h o w t h e larger credit unions in t h e group differ from their smaller counterparts, and h o w the profiles of t h e most efficient institutions in t h e group c o m p a r e w i t h t h e rest. A l t h o u g h this study parallels some of t h e work on "high-performance banks" in the finance literature, it differs in an i m p o r t a n t respect: at c r e d i t unions, " p r o f i t a b i l i t y " has no clear meaning. W e can measure retained earnings as a percentage of assets or income, just as w i t h a bank or stock S&L But many credit unions, even t h e larger ones, routinely transfer a substantial p o r t i o n of earnings back t o depositors in interest on share deposits. At numerous credit unions, in fact, interest payments are still called " d i v i d e n d s . " In cases w h e r e earnings are paid back t o depositors, o n l y enough i n c o m e typically is retained t o keep g r o w t h in t h e capital base c o m m e n s u r a t e w i t h g r o w t h in assets. Profitability, for such reasons, cannot be measured meaningfully. Even t h o u g h t h e r e is no w a y t o profile "highprofitability" credit unions, w e profiled t h e larger a n d t h e more efficient institutions t o see w h a t else sets t h e m apart. The results show that larger credit unions have lower loan/asset ratios, less loan delinquency, a n d (not surprisingly) a higher proportion of share-draft deposits. M o r e efficient credit unions have lower loan/asset ratios, charge lower loan rates and pay higher rates .on most savings instruments; they rely F E D E R A L RESERVE B A N K O F A T L A N T A Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis less on service charge i n c o m e and have a higher p r o p o r t i o n of regular share accounts. Methodology Data for t h e study came f r o m D e c e m b e r 1983 Reports of C o n d i t i o n s u p p l i e d to t h e Georgia Department of Banking and the regional office of the National Credit Union Administration by state- a n d federally-chartered credit unions, respectively. The ratios, d e f i n e d in A p p e n d i x A, were derived f r o m data on t h e 53 largest credit unions in Georgia. W e analyzed the ratios with a microcomputer database m a n a g e m e n t program, w h i c h was used t o identify t h e 13 largest credit unions and the 13 with the greatest efficiency. Efficiency was defined as a low ratio of operating expenses (noninterest) t o assets, a n d alternatively as a low ratio of operating expenses t o income. The high-efficiency samples produced by the alternative definitions were identical. After i d e n t i f y i n g these t w o subsets, w i t h 13 credit unions each, w e c o m p a r e d their performance on other financial ratios to see if t h e y differed significantly f r o m t h e remaining 4 0 credit unions. The m o r e efficient group of 13 credit unions, for example, s h o w e d an average loan/asset ratio of 59 percent, w h i l e t h e less efficient group of 40 s h o w e d an average loan/ asset ratio of 68 percent. Analysis of this difference using standard statistical "t-tests" showed t h e d i f f e r e n c e t o be significant at the 95 percent level. W e repeated this same process through a list of financial operating ratios t o see h o w t h e financial profiles of t h e more efficient credit unions differed from their less efficient peers', and h o w t h e financial profiles of t h e larger credit unions d i f f e r e d from their smaller peers'. The High-Efficiency Profile Since profitability has no m e a n i n g in t h e w o r l d of credit unions, w e chose efficiency in c o n d u c t i n g operations as t h e best measure of performance for our sample of Georgia's 53 largest credit unions. O n t h e average, t h e 13 more efficient credit unions are twice as efficient as the others (Chart 1). M e a s u r e d by t h e ratio of operating expense over assets, t h e highefficiency group averaged 1.9 percent; their less efficient counterparts averaged 4 percent. 35 October 1984 Chart 1 . Credit Unions in the High-Efficiency Group Are Twice as Efficient as Other Credit Unions or Typical Commercial Banks OPERATING EXPENSES As a Percent of Income High-Efficiency Credit Unions* Other Credit Unions* Small Bank Sample** High-Efficiency Credit Unions Other Credit Unions Small Bank Sample** - T h e difference b e t w e e n high-efficiency credit unions a n d other credit unions is significant at the 9 5 % confidence " B a s e d on 1 9 8 3 Federal Reserve Functional Cost Analysis of small banks- O p e r a t i n g expenses averaged only 17 percent of income in the high-efficiency group, compared w i t h a 33 percent average at t h e other credit unions. W h e n it comes t o efficiency, Georgia's larger credit unions also h o l d their o w n against commercial banks. Consider t h e Federal Reserve's 1983 Functional Cost Analysis Report for commercial banks under $50 million in total deposits. The 169 banks in that sample s h o w e d an average ratio of o p e r a t i n g expenses t o assets of 3.6 percent, a n d an average ratio of o p e r a t i n g expenses t o i n c o m e of 31 percent. In each case, these figures are almost equal to t h e averages for t h e 4 0 less-efficient credit unions in our sample. That indicates the high-efficiency credit unions are efficient not just in relation t o t h e other large credit unions in Georgia, b u t also t o their cousins in t h e c o m m e r c i a l b a n k i n g industry. The 13 more efficient credit unions are t w i c e as efficient as t h e others in t h e t w o most significant categories of noninterest expense as well. O n personnel expenses ( i n c l u d i n g fringe benefits) t h e high-efficiency group averaged 8 percent of income, w h i l e t h e others averaged 15 percent; o n office a n d o c c u p a n c y expenses the respective averages were 3 percent and 6 percent. The " t w i c e as efficient" rule also held for both categories of noninterest expense w h e n each was measured as a percent of assets. In addition, w e f o u n d that personnel 36 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis costs m a d e up 4 6 percent of total o p e r a t i n g costs for t h e m o r e efficient group a n d 43 percent for t h e others, suggesting that credit unions f o l l o w t h e "half of noninterest expense goes t o personnel" rule of t h u m b o f t e n a p p l i e d t o c o m m e r c i a l banks. H o w d o efficient credit unions differ f r o m their peers? Part of t h e reason for higher efficiency lies in t h e balance-sheet c o m p o s i t i o n of t h e m o r e efficient group (Chart 2). O n t h e asset side, t h e y c o u n t significantly f e w e r loans ( w h i c h are m o r e expensive t o administer than investments) t h a n their counterparts—59 percent of assets versus 68 p e r c e n t O n the deposit side, w e f o u n d a higher p r o p o r t i o n of balances in regular shares (83 percent versus 65 percent) and a lower proportion of balances in certificates (9 percent versus 26 percent). W e f o u n d no significant d i f f e r e n c e in t h e p r o p o r t i o n of balances in share-draft accounts, w h i c h are t h e most costly t o administer. Transactions per share-draft account d o not vary appreciably w i t h t h e a m o u n t of balances in t h e account, and thus neither d o t h e expenses involved in processing them. Possibly, the more efficient credit unions have f e w e r accounts b u t w i t h higher average balances. However, w i t h no i n f o r m a t i o n on average share-draft account balances at t h e credit unions in our sample, w e w e r e unable t o investigate this possibility. O n e other interesting d i f f e r e n c e b e t w e e n the high-efficiency group and the others emerged O C T O B E R 1984, E C O N O M I C REVIEW October 1984 Chart 2. High-Efficiency Credit Unions Show a Lower Proportion of Loan Assets, a Higher Proportion of Regular Share Deposits, and about the Same Proportion of Share-Draft Deposits. Loans* Regular Shares* Share Certificates* Share Drafts Assets Deposits Deposits Deposits •The difference is statistically significant at the 9 5 % c o n f i d e n c e level. f r o m our analysis: t h e m o r e efficient group actually repotted far less service charge income as a percent of total i n c o m e than t h e others—1 percent versus 3.6 percent (Chart 3). Because many credit union managers are experimenting w i t h service charge i n c o m e as an i m p o r t a n t source of revenue, w e e x p e c t e d t h e m o r e aggressive a n d (presumably) m o r e efficient credit unions to make greater use of this avenue. Apparently, t h e o p p o s i t e is happening: credit unions in a squeeze because of lower efficiency are quicker t o t u r n t o service charges than their high-efficiency cousins. At Georgia's large credit unions, service charge i n c o m e seemingly has represented a defensive reaction t o offset expenses rather than an aggressive m o v e to a d d income. H o w d o t h e efficient credit unions use their cost advantages? W e f o u n d that t h e y pass along t h e financial benefits of their efficiency b o t h t o borrowers and most depositors. O n t h e loan side, t h e m o r e efficient group charged lower interest rates across t h e board (Chart 4). O n unsecured consumer loans, these institutions charged 15.6 percent, c o m p a r e d w i t h a 16.9 percent average rate for their less efficient counterparts. O n secured loans (mainly for automobiles), t h e more efficient credit unions charged an average of 12 percent, versus 13.5 percent for t h e others. The more efficient group also charged slightly lower rates on first and second mortgages, although the differences FEDERAL RESERVE B A N K O F A T L A N T A Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Chart 3. High-Efficiency Credit Unions Rely Less on Service Charge Income. Service Charge Income As a Percent of Total Income* 3.6 1.0 Average at 13 High-Efficiency Credit Unions Average at 4 0 Other Credit Unions "The difference is statistically significant at the 95% confidence level. 37 October 1984 C h a r t 4 . H i g h - E f f i c i e n c y C r e d i t U n i o n s C h a r g e L o w e r L o a n Rates. EFFECTIVE INTEREST RATES C H A R G E D m i ( High-Efficiency Credit Unions 1 Other Credit Unions 15.6 16.9 1 3 Fi 12.0 Unsecured* Loans ^ Auto* Loans 14.1 13 5 First Mortgages 14.8 14.6 Second Mortgages "The difference is statistically significant at the 95% c o n f i d e n c e level. Chart 5. High-Efficiency Credit Unions Pay M o r e Interest on Savings and Retirement Accounts, But Less on Share-Draft C h e c k i n g A c c o u n t s and Share Certificates. EFFECTIVE I N T E R E S T RATE PAID U H High-Efficiency Credit Unions I I Other Credit Unions 10.5 10.0 9.9 ^ 10.4 7.5 5.7 Regular Shares* (Passbook) Retirement Accounts . 6.2 Share Drafts (Checking) Share Certificates •The difference is statistically significant at the 95% c o n f i d e n c e level. were t o o small t o be statistically significant. Interestingly, the high-efficiency credit unions' percentage of d e l i n q u e n t loans was no lower (or higher, for that matter), w h i c h suggests that t h e lower rates charged o n loans and t h e lower p r o p o r t i o n of loans on t h e balance sheet probably d i d not result from tighter standards for granting loans. The m o r e efficient credit unions also shared some of t h e benefits of their efficiency w i t h depositors, at least o n regular share accounts 38 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis (passbook savings) and r e t i r e m e n t accounts (Chart 5). O n regular shares, w h e r e five-sixths of their deposit funds reside, the high-efficiency group paid an effective rate of 9.2 percent, versus an effective rate of 7.5 percent at t h e other credit unions. In each case, these figures include an u n k n o w n b u t u n q u e s t i o n a b l y small p r o p o r t i o n of m o n e y market-type accounts. The high-efficiency credit unions paid slightly more o n r e t i r e m e n t accounts a n d slightly less on share-draft c h e c k i n g accounts and share OCTOBER 1984, E C O N O M I C REVIEW October 1984 Chart 6. The Largest Credit Unions Are Neither More Nor Less Efficient Chart 7. Large Credit Unions Show . . . . . . a) Lower Loan Proportions OPERATING EXPENSE* Loans Total Assets TOTAL ASSETS 3.6 69 % 54 13 Largest Credit Unions 13 Largest Credit Unions 4 0 Other Credit Unions 4 0 Other Credit Unions . . . and b) Lower Delinquency Rates. •The difference is not statistically significant at the 9 5 % c o n f i d e n c e level. certificates, b u t these differences w e r e small and statistically insignificant These findings—that high-efficiency credit unions pass t h e results of extra efficiency to their m e m b e r s in t h e f o r m of lower loan rates and higher deposit rates—highlight the difficulty of measuring profitability at these institutions. The more efficient credit unions use their profits in this way rather than a d d i n g t h e m t o net worth. Ultimately, there was no difference in t h e ratio of retained earnings t o assets b e t w e e n t h e high-efficiency group and t h e others. Percent of Loans 2 Months or More Past Due* 2.5 1.3 13 Largest Credit Unions 4 0 Other Credit Unions "The difference is statistically significant at the 9 5 % confidence level. Size Profile Georgia's 13 largest credit unions constitute a different group f r o m its 13 most efficient. W h e n w e d i v i d e d t h e state's 53 largest credit unions i n t o t h e 13 largest a n d t h e remaining 40, w e f o u n d t h e size differences were striking: the t o p 13 averaged $88 m i l l i o n in assets; t h e other 4 0 averaged a b o u t $9 million. FEDERAL RESERVE B A N K O F A T L A N T A Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis It appears that t h e larger institutions are not necessarily more efficient W e found no significant difference in either t h e ratio of operating expense to assets (Chart 6) or t h e ratio of operating expense t o income. This suggests that credit unions averaging $9 m i l l i o n in assets have no advantage or disadvantage with respect 39 October 1984 to their larger peers w h e n it comes to efficiency. However, t h e larger credit unions may be m o r e efficient o n a transaction-for-transaction basis since t h e y have a higher p r o p o r t i o n of deposit funds in share-draft accounts: 10.4 percent versus 2.9 percent. W i t h share drafts being t h e most costly f u n c t i o n t o process, t h e lack of any efficiency d i f f e r e n c e overall may m e a n t h e larger credit unions are m o r e efficient in nonshare-draft operations. O n t h e o t h e r hand, t h e higher p r o p o r t i o n of share drafts may be no costlier t o process if it reflects higher balances per account rather than a larger n u m b e r of accounts. Unfortunately, w i t h o u t i n f o r m a t i o n on average balances of share-draft accounts at each credit union, w e cannot determine whether t h e larger institutions have a larger n u m b e r of such accounts and hence higher costs in processing t h e m . The larger credit unions showed some intriguing differences in loan ratios (Chart 7). The p r o p o r t i o n of their assets held in loans was significantly l o w e r — 5 4 p e r c e n t versus 6 9 p e r c e n t — w h i c h may reflect a saturation of t h e m e m b e r s h i p eligible t o b o r r o w f r o m t h e credit union. Interest rates on loans showed no significant d i f f e r e n c e b e t w e e n t h e t w o size groups. Interestingly, t h e larger credit unions show a sharply lower percentage of delinquent loans— 1.3 percent versus 2.5 percent. W e e x p e c t e d t h e loan administrators of smaller institutions t o be closer t o t h e m e m b e r s h i p a n d t h e r e b y better able t o j u d g e credit risks. But it seems 40 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis that t h e reverse may be true: larger credit unions apparently are able to administer their loans m o r e professionally w i t h a lower degree of d e l i n q u e n c y . These are t h e o n l y significant differences w e found between the larger group and the others. The larger credit unions d i d not differ from smaller peers in their reliance on service charge income, in interest rates charged o n loans or paid o n deposits, or in efficiency of operations. Conclusion W e have investigated h o w t h e most efficient quartile of t h e 53 largest credit unions in Georgia d i f f e r e d f r o m t h e remaining three quartiles. W e f o u n d that t h e y appear to pass along t h e benefits of their efficiency b o t h t h r o u g h lower loan rates a n d higher savings interest; they rely less o n service charge income; their asset portfolios have a lower proportion of loans; and, by our definition, they are twice as efficient as their contemporaries. Turning our a t t e n t i o n t o t h e largest 13 credit unions a m o n g t h e 53, w e f o u n d that size seems t o bring less in t h e way of distinctions than does efficiency. The larger credit unions appear neither m o r e nor less efficient. They have lower d e l i n q u e n c y rates, a lower p r o p o r t i o n of loans, a n d a higher p r o p o r t i o n of share-draft deposits. Otherwise, there seem t o be few financial differences b e t w e e n t h e largest institutions a n d t h e others. O C T O B E R 1984, E C O N O M I C REVIEW October 1984 APPENDIX Variables considered in examining the performance of the largest and most efficient among the 53 largest credit unions in Georgia are outlined below. Total assets composition Total loans/Total assets Investments/Total assets Fixed assets/Total assets Loan composition Real estate loans/Total loans Other loans to members/Total loans Return on assets Income from investments/Total investments Income from loans/Total loans Loan delinquency rates All delinquent loans/Total loans Loans delinquent less than 12 months/Total loans Income composition Interest income/Gross income Fee income/Gross income Expense ratios Total operating expenses/Total assets Total operating expenses/Gross income Personnel expenses/Total assets Personnel expenses/Gross income Office occupancy expenses/Total assets Office occupancy expenses/Gross income FEDERAL RESERVE B A N K O F A T L A N T A Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Educational and promotional expenses/Total assets Educational and promotional expenses/Gross income Personnel expenses/Total operating expenses Office occupancy expenses/Total operating expenses Educational and promotional expenses/Total operating expenses Deposit composition Regular shares/Total deposits Share drafts/Total deposits Share certificates/Total deposits IRAs/Total deposits "Profitability" ratios Retained earnings/Total assets Retained earnings/Gross income Loan interest rates offered during the last week of December 1 9 8 3 Unsecured loans New vehicle loans Second mortgage loans First mortgage loans Dividend rates offered during the last week of December 1983 Regular shares Share drafts IRA/KEOGH retirement accounts Share certificates 41