Credit Unions

1
Credit Unions

• Presented by
• Andre Edwall
• Michael Frisby

2
Background Information

• Depository institutions
• Small, short-term consumer loans
• Filled the need for small loans. Reached U.S. in
  1909. MCU was established in 1914. In 1921, MCU
  became CUNEB, which became CUNA in 1935. Federal
  Credit Union Act in 1934 National Credit Union
  Act in 1970. NCUA created NCUSIF. Since 1975
  one-half of U.S credit unions closed. There are
  now 10,684 CUs.

3
Cont.

• Distinguishing characteristics tax exempt,
  non-profit, member-owned. Members must by law
  share a common bond. Cater almost exclusively to
  small () savers borrowers. Limited geographic
  diversification.
• Top 2 CUs The Navy 15,106.6 millions and State
  Employees 8,186.7 millions.
• In value of assets, CUs are significantly smaller
  than other FIs (476.2 billions), even though the
  assets have doubled the last ten years.

4
Balance Sheet

• Its biggest liability is time/savings deposits,
  which tend to be short-term.
• Its biggest asset is consumer loans, which tend
  to be long-term.
• This relationship can create short-term liquidity
  problems, especially with the common bond and the
  limited geographic diversification.
• The average leverage ratio is .905
• CUs are not subject to minimum capital
  requirements.

5
Comparison

• CUs
• Home equity 5.56
• Mortgage (30yr) 6.33
• Credit Card 10.96
• Savings Acct. 1.52
• Six-months CD 2.28

• Banks
• Home equity 5.19
• Mortgage (30yr) 6.30
• Credit Card 11.66
• Savings Acct. 1.02
• Six-months CD 1.82

6
Income Statement

• The major source of income is interest earned on
  consumer loans.
• Its major expense is interest paid on consumer
  deposits.
• Net income has fallen from 204.2 millions in
  2000 to 116.7 millions in 2002.
• The industry average forROEinsignificant
  (non-profit)ROA0.245NIM1.42

7
Risks

• Adverse selection problem personal bonds
• Moral hazard persons might pursue more risky
  ventures that will offer higher return or just be
  unwilling to repay loan.
• Solution assess and evaluate risk. Must
  recognize asymmetric information, adverse
  selection, and incentives to commit moral misuse
  of funds.
• Major risk is liquidity risk. Some degree of
  default risk.

8
Cont.

• To lessen risks short long-term loans, mergers.
• CUs do not hedge (non-profit).

9
Regulators

• National Credit Union Association (NCUA)
  regulates federally chartered credit unions.
• 1 of deposits to NCUSIF
• Funds gt1.3 of total credit union insured
  deposits must be returned to credit unions as
  dividends.