CU Times Analysis: Falling ROA in Q3 & a Bright Spot for Smaller CUs

Earnings margins fell for larger credit unions from the second to the third quarter as mortgage originations fell and assets grew strongly, a CU Times analysis found of NCUA data.

The data released Monday showed the nation’s 5,095 reporting credit unions (which now stand at 4,990) generated $5.5 billion in net income in the three months ending Sept. 30, or an annualized return of 1.09% of average assets. It was down from 1.16% in the second quarter and up from 0.80% a year ago.

As always, small credit unions had smaller margins than larger ones, but this time small credit unions showed more improvement. CU Times broke them into three roughly equal-sized groups:

1. Small: These 4,693 credit unions with less than $1 billion in assets encompassed $557.4 billion in assets and 41.9 million members. Their ROA was 0.89% in the third quarter, compared with 0.76% in the second quarter and 0.65% a year ago. The average loan balance was $11,710 on Sept. 30, down 9.6% from a year ago and down from $12,148 in the second quarter. Average savings were $6,434, up 11.6% from a year ago and up slightly from the second quarter.

2. Medium: These 320 credit unions with $1 billion to less than $4 billion in assets encompassed $629 billion in assets and 38.5 million members. Their ROA was 1.06% in the third quarter, compared with 1.11% in the second quarter and 0.85% a year ago. The average loan balance was $18,716, up 4.4% from a year ago and up slightly from the previous quarter. Average savings were $7,280, up 10% from a year ago and up slightly from the previous quarter.

3. Large: These 82 credit unions with $4 billion or more in assets encompassed $854.4 billion in assets and 49.6 million members. Their ROA was 1.25% in the third quarter, compared with 1.47% in the second quarter and 0.86% a year ago. The average loan balance was $18,345, up 3% from a year ago and up from $17,850 in the second quarter. Average savings were $7,265, up 8% from a year ago and up slightly from the previous quarter.

Each size group made gains in ROA from a year ago despite drops in non-fee operating income mainly because loan loss provisions fell to near zero.

However, only small credit unions improved their ROA from the second to the third quarter. The main difference was that non-fee income increased for small credit unions, but fell at larger ones measured against average assets. Larger credit unions draw more non-fee income from mortgages and their sales, and both fell slightly over the quarter.

Loan loss provisions had only a small negative effect on ROA as the provisions moved from rare income contributors in the second quarter to tiny expenses in the third quarter.

Net interest income, which had been declining steadily, improved by 5 to 6 basis points for each size group over the quarter.

Differences in the denominator made a huge difference too. Average assets growth ranged narrowly from 12% to 14% over the past 12 months for each size group, but over the three months assets grew much faster as size increased. The three-month gain was just 0.5% for small credit unions, compared with 1.6% for medium-sized credit unions and 2.8% for large ones.