Earnings Increase Despite Interest Margin Tightening

Credit unions are increasing alternative sources of income and turning in an outstanding performance in the third quarter in face of historically low interest rates.

 
 

Callahan & Associates hosted its quarterly Trendwatch call last week, providing a look at industry trends and performance. According to Callahan’s FirstLook data, credit unions increased non-interest income, net income, ROA, and capital ratios over one year ago. This suggests credit unions are adapting well to the decline in interest income.

Credit unions are financing, and refinancing, loans at historically low interest rates. At the same time they are moving excess liquidity into low-yielding investments. Such a combination has led to a 5.5% decline in interest income from 2011. In the third quarter of 2012, the net interest margin fell 22 basis points from one year prior to 2.95%.

NET INTEREST MARGIN
Data as of September 30 for all U.S. Credit Unions
© Callahan & Associates | www.creditunions.com

first-look-graph-1

Generated by Callahan & Associates' Peer-to-Peer Software

Although interest income is down, non-interest income increased to 1.38% of average assets, up 10 basis points over the past year. The main driver behind this increase is sales of mortgages to the secondary market. Fee income as a percent of average assets is flat, indicating credit unions are adhering to the cooperative principals and keeping member fees low.

NON-INTEREST INCOME AS A PERCENTAGE OF AVERAGE ASSETS
Data as of September 30 for all U.S. Credit Unions
© Callahan & Associates | www.creditunions.com

first-look-graph-2

Generated by Callahan & Associates' Peer-to-Peer Software

Another positive factor for credit unions is the drop in provision for loan losses. With improving asset quality, credit unions no longer need to set aside large reserves to cover potential losses. Total provisions in the third quarter are less than a third of the reserves during the height of the recession. Even with lower reserves, credit unions remain adequately prepared for any future losses. The coverage ratio remains around 120%. Credit unions have reserved approximately $1.20 for every $1 of delinquent loans.

QUARTERLY PROVISION FOR LOAN LOSS EXPENSE
Data for all U.S. Credit Unions as of June 30
© Callahan & Associates | www.creditunions.com

first-look-graph-3

Generated by Callahan & Associates' Peer-to-Peer Software

The combined effect of an increase in non-interest income and a decrease in provisions pushed net income up 7% from 2011 to $2.66 billion.

QUARTERLY NET INCOME, PRE-ASSESSMENTS
Data as of September 30 for all U.S. Credit Unions
© Callahan & Associates | www.creditunions.com

first-look-graph-4

Generated by Callahan & Associates' Peer-to-Peer Software

As net income increases, ROA is rebounding from its decline during the recession. Pre-assessment ROA is approaching the 1% threshold many credit unions aim for, and post assessment ROA is the highest since 2005. All 50 states posted a positive ROA in the third quarter, up significantly from a few years ago. (See ROA in 2009 versus 2012 by state in our Daily Featured Data Blog.)

ROA
Data for all U.S. Credit Unions as of September 30
© Callahan & Associates | www.creditunions.com

first-look-graph-5

Generated by Callahan & Associates' Peer-to-Peer Software

Although the majority of states are improving their ROA, it is the sand states — California, Nevada, Arizona, Utah, and Florida — that have reported the most significant improvement.

TOP 10 STATES BY ROA IMPROVEMENT
© Callahan & Associates | www.creditunions.com

first-look-graph-6

Generated by Callahan & Associates' Peer-to-Peer Software

Individual credit union performance is improving, and the industry as a whole is well-capitalized. Its 10.3% net worth ratio exceeds the 7% threshold defined by the NCUA. As the net worth ratio rises, credit unions will enjoy a greater freedom to offer competitive rates and lower fees.

NET WORTH
Data for all U.S. Credit Unions as of June 30
© Callahan & Associates | www.creditunions.com

first-look-graph-7

Generated by Callahan & Associates' Peer-to-Peer Software

Callahan’s FirstLook program provides analysis and access to quarterly performance data nearly a month before NCUA's official release. Come back to CreditUnions.com over the next few weeks for updates and analysis on the quarterly performance of the country’s 7,000 credit unions.
 
Callahan’s FirstLook program provides analysis and access to quarterly performance data nearly a month before NCUA's official release. Come back to CreditUnions.com over the next few weeks for updates and analysis on the quarterly performance of the country’s 7,000 credit unions.

Read more: http://www.creditunions.com/articles/credit-unions-post-highest-loan-originations-through-september/#ixzz2ChsIQT4W
 

 

 

Nov. 19, 2012


Comments

 
 
 
  • At SAFE CU we have seen our income grow 300% beyond what we budgeted for 2012 due to higher income from selling mortgage loans and lower provision for loan losses. The projection for 2013 is that income will drop from the 2012 level because mortgage sales will decline and there won't be as much opportunity to reduce the provision for loan losses. There does not appear to be any way to increase the net interest margin unless rates rise and we don't see that happening in 2013. Non-interest income proably won't increase either. In fact we may see the Durbin impacts offset any increase in debit card volumes and therefore we will see lower debit interchange. Our budget for 2013 depends on taking market share from the banks in auto lending and mortgage lending. If we can do that we will have modest net income of about 48 basis points on average assets.
    Henry Wirz
     
     
     
  • Henry, Congratulations on the great success in 2012! With interest rates remaining low, it seems a lot of credit unions are turning to new and creative ways to boost their net income instead of relying on the traditional interest income from loans and investments. Increasing market share will definitely be a priority for many credit unions into 2013 and beyond. Good luck!
    Mark Reed