Q2 Financials Inch Higher

CUs can expect only modest improvements in financial and operating results through 2012.

October 10, 2011

The jobless recovery lumbers on, with incremental shifts in the economic outlook.

Credit union financial and operating results continue to improve, albeit slowly. The recently released midyear 2011 NCUA Call Report data reveal credit union savings balances were essentially unchanged in the second quarter—increasing only 0.8% on an annualized (but not seasonally adjusted) basis.

Money market and regular shares each grew 5% (annualized) in the second quarter, but most of this growth was offset by the combination of annualized declines in share draft balances (-6.4%) and certificate balances (-5.2%).

Credit union loans grew modestly, with a 3.2% annualized (but not seasonally adjusted) increase in outstanding balances. The largest increases: used-auto loan balances (9.2%), credit card balances (8.8%), member business loans (6.4%), and personal unsecured loans (6%).

Noteworthy annualized declines: home equity loans (-4.8%) and new-auto loans (-7.2%). New-auto loans have declined for 11 consecutive quarters. They represented nearly 22% of total credit union loans at the end of 2003, but now represent less than 11%.

Because loan growth outpaced savings growth, the movement’s loan-to-share ratio increased from 69% at the end of the first quarter to 69.4% at midyear. Still, the current loan-to-share ratio remains well below the prereces-sion level of 83.4%, which was a 27-year high.

CUNA economists’ baseline forecast continues to show full-year loan growth of 2% and savings growth of 5%. This is consistent with muted growth and a membership base generally focused on paying down debt. If the forecast is correct, excess liquidity will continue to drag on bottom-line results.

Interest-rate risk profiles were mixed at midyear 2011, with net long-term assets increasing to 34.3% of total assets from 33.5% at the end of the first quarter. (For perspective, this ratio was 25% in 2005.) But, as mentioned earlier, core deposits have increased quickly, finishing the second quarter at 40.6% of total shares and borrowings.

With the Federal Reserve suggest¬ing short rates will remain low through mid-2013, it might make sense to in-vest longer-term. But while the potential yield pickup is tempting, the Fed (of course) isn’t required to do what it indicated it will do. If recovery continues and the pace is faster than expected, rates could go up sooner.

Continued uncertainty in the macroeconomy and unemployment translated to a continuation of slow asset quality improvement. The credit union 60+-day dollar delinquency rate fell from 1.63% at the end of the first quarter to 1.59% at midyear 2011. The current reading is 24 basis points (bp) lower than the 1.83% cyclical high recorded at year-end 2009. Net charge-offs also declined: from 1.01% during the first quarter to 0.9% in the se-cond. The current rate is 44 bp below the 1.34% cyclical high of fourth-quarter 2009.

These improvements led to slightly lower loan loss provisions, which continued to boost credit union bot-tom-line results. Overall, credit union return on assets (ROA) increased from 73 bp (annualized) in the first quarter to 79 bp in the second. A 5 bp increase in funding costs nearly wiped out a 6 bp increase in asset yields. Fee and other income declined 4 bp, but operating expenses fell 7 bp and loan loss provisions fell 3 bp. Overall, 72% of credit unions reported positive ROA in the second quarter.

Corporate stabilization costs will bring full-year 2011 ROA down from first-half levels. The 25 bp stabilization expense (on insured shares) will translate to full-year ROA of about 60 bp, if first-half trends continue.

NCUA’s latest estimates of corporate stabilization costs are now about $2 billion lower than previously expected. This suggests the range of remaining assessments is $1.9 billion to $6.2 billion—with a midpoint of $4.1 billion. While the corporate debacle has burdened credit unions, this latest estimate certainly is good news.

Economic uncertainty, naggingly high unemployment, and slow growth won’t disappear anytime soon. Unfor-tunately, this likely will mean only slight changes in your interactions with members and only modest improve-ments in financial or operating results through 2012.

MIKE SCHENK is CUNA’s vice president, economics and statistics. Contact him at 608-231-4228.