Net Interest Margin Stabilizes In 3Q 2013; Net Worth Tops $112.5 Billion

Credit unions increased the net interest margin by 2 basis points in 3Q13, marking the first time in three years that net interest margin rose from the previous quarter.
Janet Lee

According to preliminary data from Callahan Associates’ FirstLook program, which offers analysis and access to quarterly performance data nearly a month before NCUA’s official release, credit unions nationwide reported an ROA of 80 basis points as of third quarter 2013, down six basis points from the previous year and down five basis points from the previous quarter. The following table shows the yearly and quarterly comparisons of the industry’s business model and the breakdown of each component that comprises ROA.

Data For All U.S. Credit Unions
All data shown as a % of average assets (numbers may not sum up due to rounding)
Callahan Associates |


Source: Callahan Associates’ Peer-to-Peer Analytics

Net Interest Margin Rises In 3Q 2013

The industry’s net interest margin as of September 2013 stood at 2.79%, down 17 basis points from September 2012. However, the net interest margin improved two basis points quarter-over-quarter, thanks to a rise in the yield on investments as interest rates have increased in 2013. Credit unions’ average yield on investments increased four basis points over the previous quarter to reach 1.11% as of the third quarter. Meanwhile, credit unions’ cost of funds has remained stable in 2013.

Data For All U.S. Credit Unions
Callahan Associates |


Source: Callahan Associates’ Peer-to-Peer Analytics

Operating Expenses Steady; Provision For Loan Losses Falls

Net interest margin alone has not been sufficient to cover the day-to-day operation expenses at credit unions since the economic downturn. The operating expense ratio has remained steady at 3.07% in 2013 as credit unions continue to focus on efficiencies.

Improving asset quality helped credit unions lower the provision for loan losses. As of third quarter 2013, the provision for loan loss ratio dropped nine basis points from a year ago and remains steady versus a quarter ago. Delinquencies and charge-offs are decreasing at credit unions, decreasing the necessity to set aside large reserves to cover potential losses.

Data For All U.S. Credit Unions
Callahan Associates |


Source: Callahan Associates’ Peer-to-Peer Analytics

Non-Interest Income Holds Steady

Non-interest income as a percentage of average assets held steady at 1.42% versus September 2012. However, that is down one basis point or $205.8 million from the previous quarter. The quarterly decrease in total non-interest income is caused by a decrease in other operating income.

The quarterly other operating income at credit unions totaled $1.60 billion in the third quarter, a decrease from $1.77 billion reported in the second quarter. The decline in first mortgage sell offs is one factor in the decline in other operating income. The total amount of first mortgages sold in the third quarter was $12.3 billion compared to $16.2 billion in second quarter. As other operating income includes gains on mortgage sales, a fall in secondary market activity volume has affected the total amount of other operating income earned by credit unions.

Corporate Stabilization Expense Reduces ROA

The annual decrease in ROA is caused by the reduced net interest margin; however, the quarterly decrease in ROA is largely due to a higher stabilization expense accrual this quarter as this year’s assessment was due in September. Stabilization expense as a percentage of average assets for the third quarter stood at 0.07% compared to 0.03% in the second quarter. Had it not been for the higher stabilization expense, the third quarter’s ROA would be comparable to the second quarter’s ROA.

Higher Stabilization Expense Affects Quarterly Net Income

The annual decrease in interest earnings has primarily led to an annual decrease in net income. Meanwhile, the combination effect of a quarterly decrease in non-interest income and a quarterly increase in stabilization expense was a major reason for the decline in quarterly net income in third quarter. As of September 2013, credit unions reported $1.82 billion in quarterly net income, down from $2.13 billion in September 2012 and $2.25 billion in June 2013.

Data For All U.S. Credit Unions
Callahan Associates |


Source: Callahan Associates’ Peer-to-Peer Analytics

Net Worth Ratio Rises

The industry’s financial strength remains robust. The industry’s net worth ratio reached 10.7% as of September 2013, marking the highest level since the end of recession. The improving net worth ratio indicates credit unions are generating sufficient earnings to continue to build their capital base. Although there are uncertainties regarding the interest rate environment, credit unions demonstrated their adaptability through the Great Recession and remain well positioned to respond to member needs.

Come back to over the next few weeks for updates and analysis on the quarterly performance of credit unions nationwide.

November 20, 2013

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