Top 10 CUs See Net Interest Margins Sink in Second Quarter
Yet, ROA rises with big loss provision reversals for the largest credit unions.
But all turned to roses after Navy Federal Credit Union of Vienna, Va. ($147.9 billion in assets, 10.6 million members) recorded $214 million as income from its loan loss provisions in this year’s second quarter, after taking a provision expense of $779.4 million in 2020’s second quarter.
Such is the impact of the nation’s largest credit union — even when pooling its results with the next nine largest.
A CU Times analysis of NCUA Call Reports filed last week showed the Top 10 credit unions generated $1.6 billion in net income in the second quarter, up from $385.8 million in 2020’s second quarter and $1.2 billion in the first quarter of 2021.
Second-quarter income was an annualized 1.79% of average assets, up from a ROA of 0.50% in 2020’s second quarter and 1.52% in the first quarter.
But without loan loss provisions — positive this year or negative last year — the results would have been down.
Net interest income was 2.82% of average assets in the second quarter, down 37 basis points from 3.19% in 2020’s second quarter.
The top 10 had $355.7 billion in assets and 22.5 million members as of June 30 — more than 15% of the nation’s credit union members and assets. Their results provide an early indication of trends in the credit union movement.
The underlying trends can be seen at BECU of Tukwila, Wash. ($28.6 billion in assets, 1.3 million members) as ROA was 0.99%, down from 1.51% in 2020’s second quarter and 1.27% in the first quarter.
Loan loss provisions had less impact on BECU’s second-quarter results because it took a heavy pandemic hit of $66.7 million in 2020’s first quarter and has spread out reclaiming income, claiming $6 million in the fourth quarter, $17 million in the first quarter and $10.5 million in the second quarter.
While its second-quarter gain from its provisions added 38 basis points to its ROA, declining interest margins cut ROA by 112 basis points. BECU softened the drop with cost cutting.
BECU’s residential real estate originations were $880.1 million in the second quarter, up 20.8% from a year earlier, while its non-real estate originations, which include credit cards and auto loans, rose 28.3% to $1.6 billion. Yet its credit card balances fell 4.7% to $1.1 billion and auto loans fell 5.8% to $2.6 billion.
Robert Gatlin, BECU’s vice president of financial planning and analysis, said members have plenty of cash to spend, and they’re spending part of it to pay down loans.
“The trend was lower consumer demand in 2020 with COVID uncertainty and higher levels of prepayments due to government stimulus,” Gatlin said. “However, loan demand has picked up in 2021, but prepayments remain elevated.”
For all in the Top 10, credit card balances were $26 billion on June 30, up 2.2% from a year earlier, while auto loans rose 8.5% to $49.1 billion. Both also showed slight gains from March 31.
BECU’s non-interest income fell slightly as ROA was improved by 2 basis points from higher fees as the moratorium on loan late fees expired and lowered 6 basis points by declines in other operating income.
Despite the declines in other non-interest income, Gatlin said BECU saw higher interchange fees, “which has rebounded from low member spending in Q2 2020 and general member transaction activity has increased from COVID lows.”
BECU’s employee compensation and benefits was $79 million in the second quarter, up 10.4% from a year earlier, while its number of full-time employees rose 4.5% to 2,494.
But the wage growth still lagged assets, adding 6 basis points to ROA, while savings on other expenses added 18 bps.
Gatlin said BECU remains focused on holding expenses to year-ago levels in areas that allow it, while “hiring in limited strategic areas that require investment and in areas where production volume has increased.”
Total originations in the second quarter were $47.9 billion, up 41.3% from a year ago, and up from $38.5 billion in the first quarter. Residential real estate originations were $18.2 billion, up 26.3% from a year earlier, while non-real estate production rose 49.7% to $28.5 billion.
By far the fastest growth came from PenFed Credit Union of Tysons, Va. ($27.7 billion in assets, 2.3 million members). Its originations for the quarter were $7.8 billion, nearly triple its production a year earlier, including more than doubling its residential real estate originations to $4.3 billion.
PenFed President/CEO James Schenck said last month that he expects to maintain its loan volume through the rest of the year.
Loan quality also remained good for the Top 10.
The net charge-off ratio for the second quarter was 0.57%, down from 1.05% in 2020’s second quarter and 0.64% in the first quarter.
The rate of loans delinquent at least 60 days was 0.73% on June 30, unchanged from a year earlier and up from 0.69% on March 31.