Better Interest Margins Lift Net Income for CUs

Second-quarter net income rose 16% for federally insured credit unions as interest margins widened and non-fee operating income rose.

A CU Times analysis of the 5,596 credit unions in the NCUA’s database showed they earned $3.2 billion in the three months that ended June 30, compared with $2.8 billion in 2017’s second quarter.

The increase came despite another spike in loan loss provisions, and operating expenses that grew faster than asset and loan growth. It followed a 35.5% gain in first quarter net income, which reached $3.1 billion.

As of June 30, 2018, there were 5,480 federally insured credit unions with 115.4 million members, an increase of 5.7 million members, or 5.5%.

Real estate originations, including commercial loans backed by real estate, rose 5% to $47.8 billion for the three months ending June 30, while other loan originations grew 10% to $88.7 billion.

At Navy Federal, Vienna, Va. ($91.8 billion in assets, 7.9 million members), second-quarter real estate loan originations were $4.7 billion, up 19.1% from a year ago, while other loan originations were $10.9 billion, up 12.2%.

The nation’s largest credit union expects to originate $13 billion in purchase mortgages this year, up from $10.2 billion last year, said Randy Hopper, senior vice president of mortgage lending. He expects refinances to fall from $4.3 billion last year to $3.1 billion this year. Combined, first liens are expected to rise 11% to 13% this year.

For all NCUA-tracked credit unions, the second quarter’s annualized return on average assets was 0.89%, up 7 basis points. As usual, ROA climbed with asset size, ranging from an ROA of 0.07% (down 7 basis points) for credit unions under $10 million to 0.98% (up 5 bps) for credit unions $500 million or larger.

Loan growth exceeded asset growth. Loans grew 10.5% to $1 trillion, while assets grew 6.5% to $1.4 trillion. The pace of asset growth also tracked size, ranging from a slight drop for credit unions under $10 million to a 7.4% gain for those $500 million or more.

Overall, credit unions enhanced its gains in the robust economy by keeping expenses in check:

• Net interest income before loan losses rose 12% to $11.1 billion.
• Fee income rose 5.5% to $2.2 billion, while other operating income rose 12.6% to $2.7 billion.
• On the expense side, Pay and benefits rose 8.5% to $5.7 billion, while other non-interest expenses rose 9.4% to $5.5 billion.
• Provisions for loan losses rose 17.1% to $1.7 billion. The bulk of the expense came from credit unions in the $500 million-plus class, where the provision rose 20% to $1.4 billion.

The increase in loan loss provisions followed another big rise in the first quarter, when it rose 21.6% to $1.7 billion. Annually, the increases have been two or three times loan growth since 2015.

Meanwhile, balance sheets took hits as net charge offs rose 22.2% to $1.5 billion, or 0.42% of average loans (up 5 bps). Again, the biggest impact came from the largest credit unions where the charge-offs rose 26.5% to $1.2 billion, or 0.45% of average loans (up 7 bps).

The second-quarter gains were pulled down by $93.5 million in losses by the three largest holders of taxi medallion loans: the former Melrose Credit Union, Briarwood, N.Y. ($1.1 billion in assets, 19,864 members), LOMTO Federal Credit Union, Woodside, N.Y. ($156.2 million in assets, 2,283 members) and Progressive Credit Union of New York ($423.8 million in assets, 2,980 members).

The three contributed $83 million in loan loss provisions and $130 million in net charge offs for the three months ending June 30.

Melrose and LOMTO were put under NCUA conservatorship in 2017. NCUA liquidated Melrose Aug. 31. Teachers Federal Credit Union of Hauppauge, N.Y. ($6.1 billion in assets, 300,541 members) assumed Melrose’s members and shares, but not its taxi medallion loans.