4Q Data Reveals Positive Trends In Credit Union Core Business

Share growth has rapidly outpaced loans throughout 2009. Despite this mismatch, credit unions experienced some positive changes in their business model.


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.

Falling Investment Yields Put Pressure on Credit Union Lending
Data as of December 31, 2009
Falling Investment Yields Put Pressure On Credit Union Lending

Source: Callahan & Associates' Peer-to-Peer Software.

* Data for 7,555 FirstLook Credit Unions

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.

Gradual Shifts In The Credit Union Income Model
Data as of December 31, 2009
Gradual Shift In The Credit union Income Model

Source: Callahan & Associates' Peer-to-Peer Software.

* Data for 7,555 FirstLook Credit Unions

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.




Feb. 22, 2010


  • The second graph does not appear to take provision for loan loss into account. Net interest margin before provision is not representative. You really need to look at it after and you will see why earnings are still suffering for many credit unions.
  • Thank you for your comment. You are correct, provisions are not included; I tend to look at them as a separate item from the interest margin. Currently, provisions as a portion of average assets at year end 2009 were 1.12%, up from 0.87% last year. The suggestion was not that suffering is over for credit unions, but that there are favorable trends in the core model of how credit unions function. Looking at how these trends affect the bottom line, the average ROA for credit unions has improved to 0.20%, from 0.01% at year-end 2008. Times are still tough, but hopefully credit unions will look at this as a positive sign.
    Elliott Kashner