Earnings became a major concern for the credit union industry in 2009, with historically low interest rates, corporate write-downs, and the NCUSIF stabilization expense making earnings top of mind. Although these issues are still having an effect on bottom line earnings for many credit unions, the industry has kicked off the new year well above where it stood this time one year ago.
ROA Increases on Both an Annual and Quarterly Basis
Bottom line Return On Assets for the credit union industry was an annualized 47 basis points through the end of the first quarter. This is a positive trend for credit unions, as it is a strong increase from the 18 basis points reported for ROA at year-end. The industry also began the year well above the -1.49% reported in the previous March.
Although the widespread effects of the NCUSIF stabilization expense have rolled off of credit union income statements in 2010, it is still having an impact on credit union earnings. During the first quarter, credit unions anticipating a potential future NCUSIF assessment expensed an additional $54.9 million in NCUSIF stabilization expenses, bringing the industry down slightly from a pre-stabilization ROA of 49 basis points. This issue will continue to play out in future call report filings, as the NCUA announced Thursday there would indeed be a second assessment later in the year.
Interest Rate Environment Continues to Impact Earnings
As historically low interest rates take hold, credit unions’ income from investments has fallen 10.2% over the past year, a major contributor to the 2.7% decline in total income reported during the same period. As income levels fall, credit unions are doing their best to control their operating expense levels. Although operating expenses are still increasing, up 2.6% from the previous March, that rate of increased has slowed. Cutbacks in marketing expenses and travel & conference expenses contribute to this slowdown, but credit unions have also slowed the rate of increase for the two largest expense categories: salary & benefits and office operations.
Interest expenses have also dropped dramatically over the past year. Through the end of March, credit unions reported a total interest expense of $3 billion. This is down 27.8% from the previous March, as credit unions lowered share account rates to manage their cost of funds in this low interest rate environment. It is worth noting, however, although dividend rates at credit unions are down, they remain competitive with other financial institutions. Credit union share balances increased at an annual pace of 6.6%, which is more than three times faster than domestic deposit growth at FDIC-insured institutions.
There are many uncertainties surrounding the upcoming NCUSIF assessment, potential future assessments, and the future of interest rates. These all have the potential to impact credit union earnings moving forward. However, the fact remains that credit unions began 2010 in a better position than they started 2009 and can build upon this foundation throughout the year.