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Shrinking Margins Yet Higher ROAs? The Sustainability Question…

April 4, 2013

Unsurprisingly, many credit union leaders continue to watch their net interest margins erode in this continued, low rate environment. In fact, net interest margins have dropped to levels not experienced in over 20 years, dropping below 3% throughout all of 2012 trending down to 2.93% as of December 31, 2012 according to NCUA aggregate data.

What can be surprising is the improvement in ROA reflected in NCUA’s aggregate data. Let’s examine how much better ROA actually is compared to December 2011. While many will point to the overall ROA, it’s interesting to examine the difference if you ignored the impact of stabilization expense and NCUSIF premium. The improvement in ROA year-over-year as of December 31, 2012 is only 7 bps compared to an almost 20 bp improvement if you factor in the decrease in these expenses.


Regardless, with margins continuing to decline, how sustainable are current levels and trends of increased ROA? As you review financials within your ALCO, consider the following objective:

Communicate the impact of components of earnings that have experienced aberrations. Adjustments demonstrate the difference between the earnings reported on financials and the earnings that can be considered core to the institution.

Following are a few examples of aberrations that may be inflating ROAs unsustainably:

  • Record levels of mortgage originations/sales
  • Unsustainably-low PLL
  • Gains from the sale of investments?

2013 budgets may plan on some or all of these things continuing. Consider stress testing the budget to see the effect if these items do not continue. Furthermore, go beyond one year and stretch out the budget where 2014 and beyond does not count on these items continuing; this can help uncover a potential squeeze to earnings. Then test the impact to the risk profile of this future position.

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