Rate Compression Squeezes CUs

WASHINGTON – Continuing pressure from higher short-term rates and a flat yield curve pushed down credit unions’ 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, NCUA reported yesterday. Rising rates continued to push up cost of funds in the fourth quarter, while return on assets continued to stagnate. Jeff Taylor, senior economist at NAFCU, said 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. “Most credit unions decided to only aggressively price CDs,” Taylor told The Credit Union Journal. “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. Adding to the squeeze was the continued rise in operating expenses at a rate of 7.3% for 2006. Activity was tepid all around in the fourth quarter, with loans growing by just 1.3% and shares growing at the same slow rate. For the full year, loans grew by 7.9% and shares by 4.1%. The slowing mortgage market also had a toll, with real estate loan originations declining by 5.2% for the year, and delinquent mortgage loans soaring by 41%.