Analysis Shows Credit Union Spreads At New Low Of Just 14 BPs

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The 14 basis-point spread between net interest margin and operating expenses at credit unions during the second quarter of 2004 is the narrowest spread seen in 10 years.

According to Callahan & Associates, which performed the analysis, the ever-narrower spread combined with greater operating expenses is putting more pressure on credit unions to focus on efficiency gains within their organizations. In 1994, the spread was at 80 basis points, Callahan's said.

The news comes at the same time a partnership has been formed between CUNA, CUNA Mutual Grop and the American Association of Credit Union leagues seeking to find ways to help credit unions boost net income. The group, which is just in its formulative stages, said it is seeking to "motivate and train credit unions in cross-selling and other key strategies to enhance their growth, member satisfaction and level of service."

"Competition has been an ongoing factor in the 47 basis point decline in net interest margin since 1994, and the low interest rates of the past three years have intensified the margin pressures," said Callahan's EVP Jay Johnson. "A continuation of this trend will soon mean that the margin will no longer be large enough to cover operating expenses in credit unions."

Callahan's said that its analysis showed that while the net-interest margin continues to be squeezed, reaching 3.31% as of June, operating expenses are rising as balance sheet growth remains strong. Operating expenses have been growing at a 9.3% rate annually over the past 10 years, faster than the 8.6% annual rate of asset growth. With employee compensation accounting for 50.2% of operating expenses, it is also worth noting that the growth rate of CU staff has exceeded the membership growth rate in each of the past 10 years.

"Credit unions must look to generate a higher level of efficiency from their operations and staff as well as new revenue from non-traditional sources in order to continue to compete effectively in the marketplace," says Johnson. "Examining member service processes, leveraging technology, and expanding cooperative efforts across credit unions are ways to address this issue."

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