Credit Unions Negatively Impacted by Margins Compressing

Credit union net income fell slightly in the third quarter, representing the first quarterly decline in at least three years as falling interest rates compressed margins.

NCUA data released Dec. 6 also shows automotive loan growth slowed in the third quarter even more than originally estimated, while other data shows banks gaining ground, even in used car loans.

The nation’s 5,281 federally insured credit unions generated $3.8 billion in net income in the three months ending Sept. 30, down 1.1% from 2018’s third quarter. Quarterly net income has had gains from the year-ago quarter ranging from 1.4% in 2017’s first quarter to 39.6% in last year’s third quarter.

Falling interest rates are helping borrowers, but are cutting returns for lenders. Third-quarter net interest income — measured before loan loss provisions — was $12.2 billion, up 6.8% — the lowest quarterly gain in at least three years. Gains have ranged from 8.2% for 2016’s fourth quarter to 12.2% for 2017’s third quarter.

Net interest income is the biggest income source for credit unions, and its 6.8% gain was only slightly better than the third quarter’s 6.6% growth in average assets. Other contributors to net income were:

• The provision for loan losses grew 12.9% to $1.6 billion.
• Fee income grew 7.2% to $2.4 billion, while other operating income grew 7.7% to $2.9 billion.
• Employee compensation and benefits grew 9.7% to $6.2 billion, while other non-interest expenses grew 9.3% to $6 billion.

The resulting return over the three months represented 1.00% of the third quarter’s average assets, down 8 basis points from ROA in 2018’s third quarter.

Total loan originations for the third quarter were $149.7 billion, up 12.4% from 2018’s third quarter.

The biggest push behind the third-quarter production was the spike in originations of fixed rate loans with terms over 15 years. Those mortgages rose 66% to $30.6 billion for the quarter.

Originations for all first mortgages rose to 39.6% to $52.4 billion, while second liens were flat.

Originations of non-real estate loans grew only 1.9% to $87.7 billion, much of it from car lending, which accounts for about a third of credit union portfolios.

NCUA data shows credit unions held $374.2 billion in new and used automobile loans as of Sept. 30, up 3.5% from September 2018. Previously, CUNA had estimated the portfolio growth was 4.1% — still the slowest annual growth rate in at least five years.

Banks are now outpacing credit unions. FDIC data shows auto loans at banks grew 5.1% to $477.9 billion in September.

Credit unions’ share the value of the nation’s automotive loan portfolio in September was 31.3%, down from 31.6% in September 2018. Banks’ share gained 0.3 percentage points to 40% in September, based on market totals from the Fed.

NCUA doesn’t report automobile originations, but Experian, an Irish credit reporting company, reports market share based on the number of vehicle loans and leases.

Experian’s “State of the Automotive Finance Market” report released this month shows banks taking shares from credit unions, especially in the used car lending market, where credit unions traditionally have been strongest.

Banks originated 29.4% of the loans and leases for new vehicles in the three months ending Sept. 30, up from 26.7% in September 2018. Credit union share fell 2.8 percentage points to 11.7% in September, according to Experian.

Among used car loans, Experian found banks closed 43.7% of loans and leases, up from 34.8% in September 2018. Credit unions lost 1.1 percentage points to finance 28.8% of used cars in the third quarter.