Over the past three years, the media developed a shorthand for referring to California, Nevada, Arizona, and Florida. Although the “Sand States” have common topography (beaches and deserts), these states also had some of the largest real estate bubbles.
Now, though, second quarter data shows dramatic improvements in Arizona’s credit unions. In fact, the state’s credit unions, on average, posted a pre-stabilization expense ROA of 0.15%, the first positive return since December 2007. The post-expense ROA figure (-0.08%) was also the highest since year-end 2007 becuase of the mid-year billing of the first of two 2010 assessments. Beyond the expense, what is changing?
Focus On The Core Business
Some individual credit unions examined and disposed of assets to maintain liquidity and reserve ratios, but on the whole the state examined and tightened its core business model.
Source: Callahan & Associates' Peer-to-Peer
Significant improvements include decreases in the provision for loan losses and improvements in operating expenses. The 110 basis point (as a percentage of average assets) decrease in the provision for loan losses hasn’t left the state unprepared for asset quality issues. Arizona’s coverage ratio stands at 84.5% (read State-by-State Coverage of Asset Quality Trends for each state's numbers). If all of its delinquent loans went bad, its collective allowances would have 84.5% of the value covered before falling back to other reserves. Delinquency has risen significantly in Arizona, so the state’s credit unions may need to reevaluate their provision amounts should the economy not improve over the next few months.
Other non-interest income declined significantly because of the inflated June 2009 number from the “pass-back” of the stabilization fund from the NCUA.
The state’s 51 credit unions also reduced their operating expense ratio by 17 basis points over 12 months. By dollar amount, the largest cut was a drop in employee salary and benefits of 9.6%. Other categories posting double-digit declines were Travel and Conference Expenses, Marketing Expenses, Professional/Outside Services, and Operating Fees.
With the recent assessment for the Corporate Credit Union Stabilization Fund, Arizona credit unions have recorded $14.4 million in that account code — which is 23 basis points of their 2010 average asset base. By comparison, in 2009, Arizona credit unions had reported 81 basis points worth of assessments as an expense. At the same time the NCUA “pass-back” of the 2009 stabilization expense was recorded in Other Non-interest Income. The net stabilization expense for 2009 was in fact assisting Arizona’s’ income statements, unlike this year.
Some credit unions have never faced such a challenging environment. As Arizona moves into a post-recession economy, the tighter, leaner credit unions will need to continue to evaluate employee productivity, financial performance, and member value.