An operating environment resulting from slow growth in the economy, low interest rates, and nagging unemployment has from a macro-perspective produced an outcome of rapid savings growth, slow loan growth, and a steep yield curve.

We have seen:

  • Declining yield on assets due to lower interest rates plus the asset distribution shifting to lower-rate investments and maturing loans being replaced with low rate loans;
  • Declining cost of funds due to lower dividend rates plus the distribution of savings shifting to low-cost savings products;
  • Indeterminate net interest margin due to cost of funds falling faster than yield on assets if dividend rates are aggressively lowered.  However, if loan growth is very weak and savings growth very strong, yield on assets may fall faster than cost of funds;
  • Rising provisions for loan loss due to higher bankruptcies and charge-offs reflecting employment trends;
  • Lower operating expense to average asset ratio due to rapid savings growth increasing assets faster than the growth in operating expenses;
  • Higher fee income due to non-sufficient funds and late payments.
  • Return on assets will be flat to marginally lower; and
  • Capital-to-assets will be flat to marginally higher.

Things to consider in maintaining net income when interest rates are very low are listed below:

  • Avoid extending investment maturities significantly;
  • Limit additions to the fixed rate mortgage portfolio;
  • Don’t overreact by slashing operating expenses; and
  • Adjust rate paid on member savings downward.

Some factors to consider with respect to falling net worth ratios are as follows:

  • Members are seeking a safe place to store their financial assets (asset growth has been strong);
  • If rates paid on savings are not hyper-competitive, this savings growth can be healthy.

This blog entry you have just read was written by Edward Lis who is a former senior executive of three different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting or by calling 518-420-2108.

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