Deposit Rate Cuts Help Support ROA During 1st Quarter

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Credit unions continued to report near-record profitability during the first three months of the year in the face of a stagnant economy by slashing their cost of funds-their dividend (savings) rates-to all-time lows, according to NCUA.

As a result, the nation's federally insured credit unions reported a 1.04% return-on-average assets (ROA) for the first quarter of the year, down slightly from the 1.07% for 2002, but near historic highs. That was based on data collected from call reports submitted to NCUA by 9,602 federally insured CUs.

The loan-to-share ratio shrunk during the first quarter to 67.5% from 70.8%.

"The financial performance numbers continue to look extremely strong," said NCUA Chairman Dennis Dollar. "America's credit unions have a position of financial stability that certainly remains impressive, and it represents a commitment to safety and soundness that NCUA, our state regulatory partners and the credit unions themselves must and shall remain committed to."

The first quarter saw credit unions cut their average cost of funds to just 1.84% of assets, an all-time low, with total interest and dividend expense falling by 13% in the first quarter. Share rates dropped to near 1%, while share draft (checking) rates plummeted all the way to around 0.7%. This helped offset declining average yields on loans (7.16%) and on investments (2.71%).

Still, new savings continued to pour into credit unions in the first three months of the year, with shares increasing by $26.1 billion, easily on pace for a new record for the year. Regular shares swelled by a whopping 10.4% for the first three months, while share drafts expanded by 6.5%.

The inflow of savings helped push the key liquidity ratio, loan-to-shares, down to just 67.5%, from 70.8% at year- end 2002, even while net worth was increasing by 2.5% in dollar terms to $61.2 billion. It also bloated credit unions' investment portfolios, with total investments increasing 7% to a new high of $149.8 billion in the first quarter.

Loan growth for the first quarter was tepid, at just 0.54%. As expected, first mortgage real estate loans paced lending, as did used car lending.

Asset quality remained high, with the net charge-off ratio rising slightly to 0.54%, from 0.51% at year-end, and the delinquency ratio declining from 0.79% to 0.74%.

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