Stable Margins Present Opportunities for Leveraging Credit Union Reserves

With the current rate environment and net interest margin stabilizing, credit unions can leverage excess capital to bring in shares.


Third quarter data has arrived showing slow growth in shares and members. Credit unions are experiencing a decrease in quarterly share growth for the second quarter in a row. As a result, 12-month share growth has continued to decline, reaching 2.9% in the third quarter of 2006. While liquidity pressures are still minimal with the loan-to-share ratio at 82.2%, the ratio is at an all-time high and share growth is needed to continue to meet members’ borrowing needs.

With the interest rate environment stabilizing, credit union net interest margin has remained flat throughout 2006. This stems from loan and investment yields moving in tandem with deposit rates. Return on assets has mirrored margin trends, resulting in a relatively flat ROA as well.

At this level of ROA, the aggregate credit union capital/asset ratio has risen through the year from 11.6% on 12/31/05 to 11.9% on 9/30/06—nearly 500 basis points and $32 billion above NCUA’s “well-capitalized” threshold.  Callahan and Associates estimates that by year-end, credit union capital will rise to around $86.5 billion for a capital/assets ratio of 12.0%. 

It took about $3 billion in net income to push the capital/assets ratio from 11.6% to 12.0%.  If credit unions had held the ratio steady at year-end 2005 levels relative to assets, they could have boosted their aggregate dividends by close to 50 basis points across the board.

For credit unions who consider dividend increases a short-term tactic rather than a longer-term strategy for creating member value, this excess capital represents a powerful war chest for creating sustained member value in the form of new product R&D, branches, efficiency-enhancing technology and the like. 

To learn more about the current industry trends and benchmarks, contact Molly Francis for a complimentary demonstration of Callahan & Associates’ Peer-to-Peer software.