The average yield on earning assets for credit unions in the U.S. fell to 4.35% in the first quarter of 2011 from 4.79% in the first quarter of 2010, a decline that could be attributed to a variety of causes.
A credit union’s yield on its earning assets, which include loans and investments that earn income, is the combined result of the loan and investment policies. The higher the yield, the more successful the credit union is at penetrating its loan market, effectively pricing loans and managing its investment portfolio. It’s also likely better at managing risk in its loan and investment portfolios or any combination of these factors.
The yield on earning assets for credit unions declined each quarter of 2010 and then again from the fourth quarter of 2010 to the first quarter of 2011. In comparison, FDIC-insured institutions had a decline in yield on earning assets to 4.47% in the first quarter of 2011 from 4.86% the year prior. The broader institution group notes a higher yield than credit unions due to other institutions traditionally having additional higher-yielding investment vehicles. Generally, the higher the credit union’s loan-to-asset ratio, the higher the yield on earning assets because loans traditionally yield more than investments.
A credit union may struggle to maintain a reasonable yield on earning assets for a variety of reasons. A low loan-to-asset ratio, problems with loan pricing, and weakness in investment management are common problems. Credit unions with declining yields would need to try to reverse the drop to maintain ROA and net worth ratio levels. Possible remedies include a review of risk management strategies, loan underwriting policies, and investment policies. A review of operational strategies to improve loan market penetration should also improve the ratio.
Risk management plays an important role both in the loan portfolio and investment portfolio. Credit unions that risk price all or part of their loans will generally have a higher yield on earning assets. Credit unions with higher concentrations of more sophisticated investments, such as mortgage-backed instruments, will also have a higher yield on earning assets.