Credit unions have turned out solid core business results in 2012. During the recession, credit unions had to adjust their provisions for loan losses to accommodate increased delinquencies and charge-offs. Now that asset quality is improving, credit unions have likewise decreased their PLL coverage, which is down 23% from June 2011. At midyear 2012, the industry posted a return on assets of 85 basis points; this is up from the 77 basis points posted one year ago. At 90 basis points, pre-assessment earnings are also up from one year ago.
Decreased interest income, however, has affected credit union earnings. The core earnings ratio — earnings prior to non-operating expenses such as the TCCUSF stabilization assessment and provisions for loan losses — is down nine basis points to 1.24% as of June 2012. The net interest margin also narrowed to 2.96% at midyear. The first quarter of 2012 marked the first time the margin fell below 3.00%. Consequently, credit unions are carefully managing expenses. The expense ratio prior to accruals for NCUA assessments was 3.07%, essentially flat from 2011.
Although interest income is lower, non-interest income increased from 2011. Expressed as a percentage of average assets, fee income was stable — 0.72% — from midyear 2011. Other operating income, however, increased eight basis points to 0.62%. This increase is significant and is largely the result of mortgage sales to the secondary market.
Ultimately, an improved bottom line at credit unions across the country has resulted in increased reserves. The net worth ratio increased to 10.2%, up from 10.1% in June 2011. Total capital, which includes the allowance for loan losses, has also increased. Credit unions hold more than $107 billion in capital, which is 11.0% of total assets.
Credit unions should start coming up with earning assets strategies so any alternative capital they raise will help, not hurt, the bottom line.
In His Own Words
Hank Sigmon, CFO
First Tech Federal Credit Union
Palo Alto, CA
"I am confident that sometime in the not-too-distant future Congress will grant credit unions the authority to raise supplemental capital. But strategically we all need to think about how we are going to put that capital to work. If the capital is raised just to move up the PCA capital ratio, then there is a risk doing so could put additional pressure on the ROA. That’s pressure credit unions can ill afford.
"In the present environment we are all seeing strong growth. Consumers are flocking to credit unions for all the right reasons — but in this ultra-low-rate environment we are having trouble generating sufficient retained earnings, capital, to support that growth. The Federal Reserve’s recent QE3 announcement is going to keep interest rates low, so the net interest margin will remain under pressure for some time. All this cries out for alternative, or supplemental, capital. But the capital is going to come with a cost, and if credit unions cannot cover the cost, it will hurt rather than help.
"Here’s an example. If you want to raise your capital ratio from 6% to 8% and you have to pay 5% for the capital, that 5% cost is going to be a 10-basis-point drag on your ROA. We need to be thinking about what else we are going to do on the balance sheet to cover the cost of capital and generate additional retained earnings.
"Credit unions should start coming up with earning assets strategies so any alternative capital they raise will help, not hurt, the bottom line."
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