Lending from the country’s largest credit unions fell sharply in the third quarter. And while core operating income continued this year’s improving pattern, credit quality continued to deteriorate from the unusually high quality of the pandemic era.
The top 10 credit unions by assets generated $919.8 million in net income, or an annualized 0.95% of average assets, for the three months ended Sept. 30, compared to an ROA of 1.38% in the third quarter 2021 and 0.96% in the second quarter of this year. Much of the change in ROA is due to a sharp increase in the provision for loan losses, which is subject to wide volatility.
Credit union adviser Mike Higgins instead measures net operating income, where net charge-offs replace loan loss provisions.
The annualized return on net operating income was 1.13% in the third quarter, compared to 1.10% a year ago and 0.96% in the second quarter, as growth in net interest income outweighed investment losses and slowing lending.
Not only did home loan originations decline, so did non-home loans, which included auto loans as the largest component.
Non-home loan output was $22.6 billion for the three months ended September 30, down 27% from $25.1 billion in the second quarter and down 30.9 % in the third quarter of 2021.
The NCUA does not collect data on auto loan origination, but auto loan balances increased in both September 2021 and June 2022.
The top 10 held $23.9 billion in new vehicle loans as of September 30, up 13.4% year-on-year and more than $23 billion as of June 30. Used car loans were $36 billion as of September 30, up 17.8% year-on-year and up from $35.1 billion on June 30.
Home loan originations were $11.8 billion in the third quarter, down 33% from $17.6 billion a year earlier and $15.4 billion in the second quarter.
Fee-free operating income fell from an annualized 0.96% of average assets in the fourth quarter of 2020 to 0.39% in this year’s third quarter. This included a -0.5% loss on investments and a 0.44% gain on the NCUA’s “Other operating expenses” line, which would include gains on mortgage sales.
The top 10 sold $3.3 billion of first mortgages in the third quarter, down 58% year over year but up from $238.3 million in the second quarter.
“In ‘normal times’ most home sales occur during the summer season so it would make sense that there is an uptick (in mortgage sales) from Q2, but I don’t think it can be called an uptrend. The change from year to year is where the story exists,” Higgins said.
However, net interest income has steadily increased from 2.82% of average assets in the second quarter of 2021 to 3.49% in this year’s third quarter.
Higgins said asset yields are most likely growing faster than funding costs.
For example, the top 10 credit card balances as of Sept. 30 were $32.2 billion, up 18% year over year and up from $30.8 billion as of June 30, it said.
Some economists are forecasting a recession early next year as the Fed continues its rapid rate hikes.
That would make credit quality a key issue. Lenders have had little to worry over the past two years as troubled borrowers reduced arrears and write-offs to record lows.
“Asset quality is still strong, but I’m still cautious, especially if we enter a recession where jobs are lost,” Higgins said. “When rates go up, you get more margin, but that comes at the expense of volume and other revenue. It’s a classic trade-off between rate and volume.”
Credit quality has declined in the top 10.
The top 10 shed an average of 0.97% of loans on an annualized basis in the third quarter, up 43 basis points from 0.54% a year ago and up 0.74% in the second quarter.
The delinquency rate for the top 10 was 0.92% as of Sept. 30, up 16 basis points from a year earlier. It was 0.80% on June 30 and 0.68% on March 31.
The top 10 accounted for $387.5 billion in assets as of Sept. 30 and 25.1 million members — about 20% of all credit unions. Total credit output was $119 billion, down 12.7% year over year.
The composition of the group was unchanged from the second quarter, but Chicago-based Alliant Credit Union was inches ahead of Salt Lake City-based America First Federal Credit Union. Here is a summary of their findings:
- Navy Federal Credit Union, Vienna, Virginia ($156.5 billion, 12.1 million members) had an ROA of 1.16% in the first quarter, compared to 2.05% a year earlier. Lending was $46.4 billion, down 28.9%.
- Credit Union of Government Employees, Raleigh, NC ($52.1 billion, 2.7 million members) had a 1.19% ROA in the first quarter, compared to 1.14% a year earlier. Originations were $9.9 billion, up 10%.
- PenFed Credit Union, Tysons, Va. ($35.9 billion, 2.8 million members) had an ROA of 0.81% in the first quarter, compared to 1.05% a year earlier. Lending was $20.3 billion, down 9.7%.
- BEKU, Tukwila, Wash. ($29.2 billion, 1.4 million members) had an ROA of 0.05% in the first quarter, compared to 1.03% a year earlier. Originations were $8 billion, up 1%.
- Schools First Federal Credit Union, Santa Ana, California ($27.7 billion, 1.3 million members) had a 0.8% ROA in the first quarter, compared to 0.69% a year earlier. Lending was $6.4 billion, up 14%.
- Golden 1 credit union, Sacramento, California ($18.3 billion, 1.1 million members) had an ROA of 0.68% in the first quarter, compared to 0.85% a year earlier. Lending was $5.8 billion, up 23.5%.
- Allianz Credit Union, Chicago ($18 billion, 734,595 members) had a 1.09% ROA in the first quarter, compared to 2.05% a year earlier. Lending was $5.1 billion, up 20.5%.
- America First Federal Credit Union, Riverdale, Utah ($17.6 billion, 1.3 million members) had a 0.98% ROA in the first quarter, compared to 1.83% a year earlier. Lending was $6.7 billion, down 15.7%.
- First Tech Federal Credit Union, San Jose, California ($16.4 billion, 646,500 members) had an ROA of 0.22% in the first quarter, compared to 1.35% a year earlier. Lending was $4.6 billion, down 3.5%.
- Suncoast Credit Union, Tampa, Fla. ($15.7 billion, 1.1 million members) had a 0.95% ROA in the first quarter, compared to 1.34% a year earlier. Lending was $5.7 billion, up 35.5%.