Last week, as part of our ongoing analysis of Callahan & Associates First Look data for 4th quarter of 2009, Nick Connors investigated sources of growth for the credit union industry in 2009. While the industry experienced remarkable year-over-year share growth of 11.6% providing increased liquidity for the system, the majority of these new funds were channeled into short-term, low-rate investments. Outstanding loan growth slowed to 2.1%. In 2008, both loans and shares grew at nearly the same rate, just shy of 8%.
There are lingering ALM concerns surrounding this loan-to-share growth mismatch. Excess liquidity has lead to a dramatic 28.5% growth in investments, but with average investment yields hovering just north of 2 percent, credit unions have become justifiably concerned about converting new shares into a reliable source of revenue.
The average yield on investments and the average cost of funds have historically maintained a gap of 100 to 200 basis points. By the end of 2009, this gap had closed to just 20 bps. This further highlights the concerns that many credit unions share regarding the loan-to-share growth mismatch. With the gap between the yield on investments and loans the widest it has been in years, it does not seem investments are generating sufficient revenue (although, they are better than keeping the funds as cash, or attempting to turn away excess shares).
However, it is worth noting that despite the turnaround in growth rates for loans, shares, and investments, their relative size compared to total assets have remained steady. Loans make up about 64.2% of assets, down 3.5 percentage points from year end 2008; shares at 86.0%, up 0.7; and investments 31.2%, up 3.7. The relative size of each of these, combined with the shifting rate dynamics, resulted in an important change in 2009.
By bringing down the cost of funds, and maintaining yield on loans, credit unions have managed to increase their net interest income by 7 bps. Additionally, by focusing on cutting costs, credit unions shrank their operating expenses by 2.7%, resulting in a 4 basis point decrease in the operating expense-to-average assets ratio. The result is that, for the first time in four years, the net interest margin surpassed the operating expense ratio. In other words, the difference between the cost of funds and the yield on earning assets have become great enough that they can cover the day-to-day operations at credit unions without supplemental non-interest income.
With the future of non-interest income uncertain, considering potential legislation limiting overdraft protection and interchange income, finding reliable sources of interest income will be critical for credit union success this year. Credit unions need to focus on building the loan portfolio, not only to provide much-needed credit to members, but to generate sufficient revenue to build retained earnings and capital.