Preliminary first quarter data through Callahan’s First Look program indicates that credit union dividend payments to members continue to increase at a faster pace than interest income growth. The result is a continued tightening of the net interest margin, although the margin decline is less than half the rate posted by these credit unions in first quarter 2006. The 217 First Look credit unions represent $181 billion, or approximately 25 percent of the industry’s assets
Although the margin squeeze seems to be slowing, return on assets declined at a faster rate than in first quarter 2006. The difference is due to increases in operating expenses and the provision for loan loss, both of which are rising at a faster rate than asset growth. Operating expense growth is led by increases in salaries and benefits while the provision for loan losses is rising as delinquent loans are up. The chart below shows the breakdown of the changes in the credit union earnings model.
While ROA is lower, credit unions are still posting healthy results overall. Capital continues to grow, with the net worth to assets ratio up slightly from first quarter 2006. Delinquent loans as a percentage of total loans are also up slightly from first quarter 2006 but essentially unchanged from year-end results.
As discussed last week, share growth is picking up as credit union dividends rise at an over 40 percent annual rate. With growth being a primary objective of many credit unions, the decline in ROA would seem to be an acceptable trade-off. With a strong capital base, credit unions can manage with a lower ROA, particularly if it will lead to incremental growth.
With narrower margins now the norm, the key for credit unions will be to control operating expenses. Investments in products, personnel and delivery channels are important to future growth, but ensuring that these are prudent expenditures will be important to longer-term earnings health.