Small Credit Unions’ ROA Was Half of Big Credit Unions

While credit unions overall showed a spectacular leap in earnings in the first quarter, the gains were modest among smaller ones.

NCUA data released June 4 showed the nation’s 5,175 credit unions generated $5 billion in net income in the three months ending March 31, more than double the $2.1 billion earned in 2020’s first quarter, which was marked by heavy loan loss provisions after COVID-19 was declared a pandemic on March 11.

The recent quarter’s earnings represented an annualized 1.04% return on average assets, up from 0.53% ROA in 2020’s first quarter.

As in the past, the results improved with size. A CU Times analysis showed credit unions with less than $1 billion in assets earned at half the rate of credit unions with $4 billion or more in assets.

There were 1,160 credit unions with net losses in the quarter, compared with 975 a year earlier. Among the 5,175 credit unions reporting in March, 2,943 of them had a decline in net income. Most of the poor results were among small credit unions.

One of the biggest factors in the first quarter’s improvements came from loan loss provisions, which were $725.7 million for the three months ending March 31, down 65.8% from 2020’s first quarter.

Most of the first quarter’s provision benefits went to large credit unions, which had been the most aggressive in hedging against the unknown scale of the pandemic risk in early 2020.

Overall provisions fell by $1.4 billion, with $824.9 million of the savings going to credit unions with at least $4 billion in assets and only $243.1 million going to credit unions with less than $1 billion in assets.

Small credit unions also suffered from the usual burden of higher operating expenses. Small here refers to credit unions with less than $1 billion in assets, a mark picked because it represented about a third of the movement’s assets.

• For small credit unions, first-quarter ROA rose 23 bps to 0.66%.
• For medium credit unions ($1 billion to less than $4 billion), ROA rose 48 bps to 1.00%.
• For large credit unions, ROA rose 72 bps to 1.32%.

In the 12 months ending March 31, 44 credit unions surpassed $1 billion in assets and 19 surpassed $4 billion. None sunk below those thresholds.

The first quarter’s overall 1.04% ROA was perhaps the highest in more than 18 years, according to Callahan & Associates, the credit union company based in Washington, D.C.

Callahan measures income on a year-to-date method, which means after the first quarter, the most recent quarterly results get averaged with old results. Corporations and most non-profits report discreet quarterly data beside year-to-date results.

In any case, Callahan’s records showed the highest ROA was 1.05% for the nine months that ended September 2002. It was 1.04% for the 12 months of 2002, and the last time ROA was above 1% was for the nine months ending September 2003, when ROA was 1.01%.

Callahan nearly nailed the first-quarter ROA in its May 12 Trendwatch report, estimating it at 1.03%. The joint CUNA and CUNA Mutual Group Feb. 8 forecast expected 0.60%.

One of the reasons for CUNA’s caution was its concern about shrinking net interest margins.

Indeed, falling interest margins were the biggest negative element to earnings, cutting ROA by 39 basis points. But credit unions cancelled that out with a 39 bps reduction in overhead.

They added another 84 bps through higher operating income. Fees fell slightly, continuing a long-term trend that was accelerated by the pandemic. However, other operating income swelled by 94 bps, much of it from loan sales as mortgage originations continued to swell.

On top of all that, credit unions added 38 bps with lower loan loss provisions. Only 397 credit unions took $7.5 million as income from their loan loss provisions in 2020’s first quarter, while 934 credit unions claimed $112.8 million from provisions in this year’s first quarter.

Provision gains of $5 million or more were from:

• BECU of Tukwila, Wash. ($28.2 billion in assets, 1.3 million members) had a provision gain of $17.3 million, compared with a $66.7 million expense a year earlier.
• Alliant Credit Union of Chicago ($14 billion, 586,435 members) had a provision gain of $8.4 million, compared with a $53.8 million expense a year earlier.
• Randolph-Brooks Federal Credit Union of San Antonio ($13.4 billion, 959,680 members) had a provision gain of $5 million, compared with a $19.3 million expense a year earlier.

More than half of credit unions reported less than $150 in loan loss provision in the first quarter, compared with a median of $10,690 a year earlier.