Rate Compression Still Squeezing CU Movement
WASHINGTON-Continuing pressure from higher short-term rates and a flat yield curve pushed down CUs' bottom lines in the fourth quarter, with return-on-average assets, the industry's key profitability indicator, falling to just 0.82, near a 10-year-low, according to NCUA. Rising rates continued to push up cost of funds in the fourth quarter, while yields on assets stagnated.
Credit unions have reacted to the rising rate environment by lifting the rates they pay on longer-term CDs, causing a mass transfer of funds from lower-paying regular shares and share draft accounts, and pushing up cost of funds, according to NAFCU Senior Economist Jeff Taylor.
"Most credit unions decided to only aggressively price CDs," said Taylor. "There's a lot of money moving from low-cost shares and share drafts to higher-cost CDs." For the year, average cost of funds rose to 2.34% of assets, from 1.72% for 2005.
As a result, CDs soared by 24% for the year, exceeding regular shares for the first time ever by year-end, and regular shares and share drafts both declined by 7% for the year. Operating expenses rose by 7.3% for 2006 while fee income slowed to 8.4%, versus 9.3% in 2005.
Loans, shares and assets all grew by just 1.3% in the fourth quarter. For the full year, loans grew by 7.9% and shares by 4.1%. Assets increased by 5.6%.
The slowing mortgage market also took its toll, with real estate loans declining by 5.2% for the year, and delinquent mortgage loans soaring by 41%.
Both used and new auto lending slowed in the fourth quarter, but credit card lending was strong, up 11% for the year, much of it due to members substituting home equity loans with their rising rates, for credit card debt.
