The NCUA won’t officially release second quarter data for another month, but Callahan & Associates’ FirstLook program – which includes more than 40% of the industry’s data by both number and assets – is well underway. Initial industry figures reflect the larger economy’s improvement.
The 3,300 credit unions in FirstLook are a respectable proxy to identify average industry trends as they have an average asset base of $120 million and average membership size of 12,000. A performance comparison of this segment of the industry to prior periods shows an improvement in asset quality, strengthened earnings, and a continued need to focus on lending.
Asset Quality Improvement
FirstLook credit unions have posted their second quarterly decline in both delinquency and charge-offs for the first time since early 2006. Following first quarter improvements, the delinquency ratio declined another five basis points to 1.68%.
This improvement is not the result of an increase in charge-offs. Net charge-offs improved as well, falling four basis points to 1.17%.
Stabilizing asset quality has allowed credit unions to contribute a smaller percentage of their income to the provision for loan losses. As a percentage of average assets, the PLL declined to 0.82%, down from 1.09% in June of 2009. Even so, the coverage ratio, a measure of the credit union’s allowance for loan losses to total delinquent loans, increased to 96.3%, up 4.7 percentage points from March’s figure of 91.6% for FirstLook credit unions.
Pre-Assessment Earnings Strong
Interest income declined as a percent of assets, down to just 4.61% for FirstLook credit unions, but other measures improved. Operating expenses and interest expense as a percent of average assets each declined four basis points to 3.00% and 1.36% respectively. These small improvements, along with a corresponding four basis point bump in non-interest income, led to improved earnings.
FirstLook credit unions posted an annualized ROA of 0.68% prior to any stabilization expenses. The same credit unions posted a pre-stabilization ROA of 0.56% as of March, so the overall business model improved in the second quarter. However, NCUA’s billing for the first assessment of 13.4 basis points on insured shares for the Corporate Credit Union Stabilization Fund drug down post-stabilization ROA to 0.47%.
Focus On Lending
FirstLook analysis emphasizes the continued need for credit unions to focus on lending. Annual share growth for these credit unions declined from a rate of 7.4% at March to 6.7% at June. Share growth still dramatically outpaces loan growth, but the spread has tightened from the 9.2% peak at 4Q 2009.
Loans held on the balance sheet have essentially stayed level year over year. Year-to-date originations for FirstLook credit unions is down 21.2% from one year ago, which is a slight improvement over March’s comparative decline.