A Regional View Of Earnings And Capital In The Third Quarter Of 2020

Credit unions in the West reported the largest decline in ROA. See what else has happened across the United States.

 
 

Return on assets (ROA) is a powerful metric that helps credit union leaders determine how efficiently their institution is generating income from its available assets. Examining ROA from a regional perspective illuminates the extent to which credit unions in different parts of the country have been affected by the COVID-19 pandemic and the resulting economic chaos.

The following analysis is based on performance data from credit unions in regions designated by United States Census data. Those regions are:

  • Mid-Atlantic — NJ, NY, PA
  • Midwest — IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI
  • Northeast — CT, MA, ME, NH, NJ, NY, PA, RI, VT
  • South — AL, AR, DE, FL, GA, KY, LA, MD, MS, NC, OK, SC, TN, TX, VA, WV
  • West — AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY
 
 

STATE RANKING BY YOY CHANGE IN ROA

FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.20
SOURCE: CALLAHAN & ASSOCIATES; FDIC

Rank State 3Q 2019 3Q 2020 Change In ROA
1 Idaho 1.16% 1.23% +7 bps
2 Arkansas 0.84% 0.85% +1 bp
3 New York 0.63% 0.64% +1 bp
48 Colorado 1.07% 0.51% -56 bps
49 South Carolina 1.14% 0.58% -56 bps
50 Arizona 1.11% 0.20% -91 bps

Nationally, ROA decreased 32 basis points from the third quarter of 2019 to the third quarter of 2020. At -34 basis points, credit unions in the West reported the largest decline. Credit unions in the Mid-Atlantic reported the smallest decline, -11 basis points.

Asset growth averaging 16.6% combined with a 25.2% year-over-year decrease in net income pushed down ROA across the nation. The net income decline was in part the result of a 47.3% spike in provision expenses and a 0.7% decline in interest income; operating expenses, however, increased 5.9% year-over-year. Declining net income was more pronounced in the Northeast (-29.5%), South (-26.4%) and West (-24.0%), whereas credit unions in the Midwest (-5.3%) and Mid-Atlantic (-6.3%) experienced more muted effects.

Increased mortgage activity, notably originations and sales to the secondary market, provided much needed non-interest income for many credit unions across the country. The two regions with the largest annual growth of non-interest income — the Midwest (16.2%) and West (13.4%) — also reported selling the highest proportion of first mortgages to the secondary market, 53.1% and 42.2%, respectively.

Following initial earnings shock in the first quarter, ROA steadily regained ground in the third quarter. A pullback in provision expenses relative to earlier quarters and rising non-interest income were two major factors in this shift. From July to September, provision expenses fell 18.2% nationally. The most pronounced quarterly swing occurred at credit unions in the West, where provision expenses fell 30.6%. Comparatively, non-interest income in the third quarter increased 12.0% from the quarter prior. Gains on mortgage sales and an uptick in consumer spending both contributed to that.

STATE RANKING BY YOY CHANGE IN NET WORTH RATIO

FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.20
SOURCE: CALLAHAN & ASSOCIATES
Rank State 3Q 2019 3Q 2020 Change In Net Worth Ratio
1 Rhode Island 10.40% 9.97% -43 bps
2 Iowa 10.92% 10.41% -51 bps
3 Virginia 10.76% 10.20% -56 bps
48 Georgia 13.05% 11.63% -142 bps
49 Mississippi 14.54% 12.95% -159 bps
50 Arizona 12.17% 10.37% -180 bps

From the third quarter of 2019 to the third quarter of 2020, the net worth ratio at credit unions nationally dropped 95 basis points to 10.4% as of Sept. 30. A 16.6% increase in assets combined with a 24.9% drop in net income largely drove the decline in net worth. However, allowance accounts jumped 32.7%, which also accounted for some of the contraction in the net worth ratio.

After declining 32.3% from year-end 2019 through March 31 2020, quarterly net income growth jumped 23.1% in the second quarter and 36.4% in the third quarter. Allowance accounts trended similarly, growing at 13.4% in the second quarter and 10.1% in the third, notable increases from 5.2% in the first quarter of 2020.

Digging deeper into regional performance, credit unions in the West reported the largest year-over-year decrease in the net worth ratio — -1.1 percentage points. Unfortunately, the asset growth these credit unions reported — 18.6%, the highest of any region — could not compensate for their 24.0% decline in net income. Credit unions in the Mid-Atlantic — bolstered by asset growth of 14.5% and net income growth of 0.06% — reported the smallest decline in the net worth ratio, -0.8%.

It is important to note that although net worth ratios have declined, they are beginning to stabilize. After decreasing 55 basis points from the first quarter to the second quarter of 2020, the average net worth ratio fell just 2 basis points from the second quarter to the third quarter.

Net worth ratios for the Midwest and the Mid-Atlantic increased 7 basis points quarter-over-quarter; the Northeast held steady; and the South and West reported declines of 3 and 10 basis points, respectively.

ROA BY ASSET BAND

FOR U.S. CREDIT UNIONS| DATA AS OF 09.30.20
SOURCE: CALLAHAN & ASSOCIATES

Declines in ROA from the third quarter of 2019 to the third quarter of 2020 aligned with asset size. Larger credit unions reported more favorable returns than their smaller peers, with non-interest income revenue streams acting as a primary difference maker.

Credit unions greater than $1 billion in assets grew non-interest income 13.1% year-over-year, but smaller peers struggled to keep pace. Credit unions with $100 million to $1 billion in assets reported an increase in non-interest income of 2.7%, whereas credit unions with less than $100 million in assets reported an average decline of 1.3%. Large credit unions outperformed their peers in terms of growing interest income and reducing interest expense, at 0.8% and -6.0%, respectively. All asset bands experienced similar reductions in net income, which averaged -34.5% year-over-year through Sept. 30.

Although ROA contracted annually, credit unions rebounded in the third quarter of 2020. Cooperatives with $100 million and more in assets increased ROA 9 basis points, on average, quarter-over-quarter. Comparatively, credit unions with less than $100 million in assets increased ROA 7 basis points.

Provision expenses were the most significant driver in the variance of ROA growth nationally. Provision expenses spiked in growth in the first and second quarter, growing 25.4% and 27.8%, respectively. However, as the year progressed quarterly provision expense growth declined 18.1% as credit union allowance accounts ballooned, in part due to near record low charge-offs. Similarly, despite an initial 4.2% quarterly decline in the first quarter, as the economy reopened and consumer spending picked up from March lows, non-interest income grew 1.0% in the second quarter, and jumped another 18.8% in the third quarter, contributing to the rebound in ROA.

NET WORTH RATIO BY ASSET BAND

FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.20
SOURCE: CALLAHAN & ASSOCIATES & NCUA

Although the net worth ratio compressed across all asset bands compared to the third quarter of 2019, credit unions continue to be well capitalized nationwide. Institutions greater than $1 billion in assets grew net worth 7.6% annually, credit unions between $100 million and $1 billion in assets grew net worth 6%, and credit unions with less than $100 million in assets grew net worth 3.5%. Despite modest net worth growth, surging asset balances across all asset bands contributed to compressed ratios.

After falling 55 basis points nationally in the second quarter of 2020, credit union net worth ratios declined 2 basis points in the third quarter — a clear sign of stabilization. The net worth ratio at credit unions with less than $100 million in assets decreased 5 basis points in the third quarter compared to 75 basis points in the second quarter. At credit unions with $100 million to $1 billion in assets, the net worth ratio decreased 5 basis points compared to 67 basis point. And, at credit unions greater than $1 billion in assts, it decreased 3 basis points compared to 50 basis points.

As credit union net worth ratios stabilize and earnings show signs of recovering following elevated provisioning in the first half of 2020, margin compression will vary by institution and membership as loan and share portfolios reprice. Similarly, credit unions should be sure to monitor their asset quality moving forward, as uncertainty surrounding future losses remains due to the lagging economic recovery. In all likelihood, the full picture of the financial health of credit union members will continue to evolve in the coming months and quarters.

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