Some Good News for CUs as Q1 Earnings Set Record Despite Slow Loan Growth

Credit unions in the first quarter reaped their largest returns on assets in more than 18 years, Callahan & Associates said Wednesday.

Net income for the three months ending March 31 was an annualized 1.03% of average assets — the highest since 2002’s fourth quarter and the first time it has risen above 1% since 2003, according to the quarterly Trendwatch report from the credit union company based in Washington, D.C.

ROA fell to a low of 0.53% in 2020’s second quarter as COVID-19 was declared a pandemic March 11. It rose steadily to reach 0.83% in the fourth quarter.

Despite Wednesday’s Labor Department report that the 12-month inflation rate was 4.2% in April, overall economic growth was 6.5% for the first quarter and the rise in long-term interest rates will benefit credit union interest margins.

“The economy feels like it’s going to be positive for the rest of the year,” Jay Johnson, Callahan’s chief collaboration officer, said during the webinar presentation.

Callahan found the biggest gain for ROA came from a sharp drop in loan loss provisions. They were only about $700 million in the quarter, the lowest level in at least five years. They spiked to $2.1 billion in last year’s first quarter and reached a high of $2.7 billion in the second before falling back to $1.8 billion in the fourth quarter.

At the onset of the pandemic, many in the movement expected asset quality to fall. But strong fiscal and monetary support allowed families to maintain their payments, so that delinquency and charge-off rates actually have fallen from pre-pandemic levels.

Net interest margins fell from 3.16% of average assets in 2020’s first quarter to 2.75% in this year’s first quarter, but the drop in operating expenses was also steep. The expense ratio was 2.56%, down from 2.95% a year earlier.

While those factors roughly canceled each other out, total operating income increased by nearly $1 billion. Fee income fell 2.4% to $2.1 billion, while other operating income rose 34.6% to $4 billion.

First-mortgage originations were a major factor. They were $75 billion for the quarter, up 49% from 2020’s first quarter and just below the record volumes of the last three quarters of 2020. Credit unions sold about 30% of those mortgages with the proceeds falling into the “other operating income” category.

That might not last. For the full year, the Mortgage Bankers Association expects first-mortgage originations for all lenders to fall 14.2% as refinances fall 32% and purchases rise 16%.

Besides first mortgages, other credit union loan originations grew 21% to $107 billion — their highest mark since at least 2019’s fourth quarter.

But Alix Patterson, Callahan’s chief experience officer, said origination growth faded in the portfolio because of loan sales and a continuing surge in member savings, much of it used to pay off credit cards and to a lesser extent auto loans.

“We’re kind of spinning our wheels,” she said. “Credit union members are paying down debt almost as fast as credit unions can originate it.”

Credit unions held $1.18 trillion in loans as of March 31, up only 4.4% from a year earlier, while savings were $1.71 trillion, a 23.2% gain that is the largest on record.

Credit unions bought a larger-than-usual amount of loan participations to help make up for the low yields they would otherwise earn in short-term investments. And rising long-term rates helped interest margins for the loan portfolio.