Navy Federal Shows Impact of Provisions on Results

Credit union results look dramatically different this year when loan loss provisions are removed.

That was the case in the second quarter with the nation’s largest credit union, Navy Federal Credit Union of Vienna, Va. ($147.9 billion in assets, 10.6 million members).

For the three months ending June 30, it generated $921.1 million in net income, including a $214.3 million gain as it reeled in part of its loan loss provisions. In 2020’s second quarter, net income was $67.3 million after subtracting a $779.4 million loan loss provision.

As it was, net income was an annualized 2.66% of average assets for the second quarter, up from 0.23% in 2020’s second quarter.

Removing the provisions, income was 2.04% of average assets in the second quarter, down from 3.00% a year earlier.

The biggest factor in income was net interest. For Navy Federal, it was $1.3 billion in the second quarter (before loan loss provisions), basically unchanged from either 2020’s second quarter or this year’s first quarter. When weighted for average assets, it was down 13% from a year earlier.

For all credit unions in the Top 10, total loan originations were $47.9 billion for the three months ending June 30, up 41.3% from 2020′s second quarter.

Navy Federal’s originations grew a smaller, but respectable 29.5% to $23 billion.

The pattern of growth was similar: Faster growth shifting from real estate to other loans. Navy Federal’s residential real estate originations grew 8.4% to $6.8 billion, while non-real estate production grew 41% to $16.2 billion.

Navy Federal has been faster in portfolio growth than others. It held $89.1 billion in loans on June 30, up 6.4% from a year earlier. Growth was 3.1% for the Top 10 and 4.8% for all credit unions.

Balances for new auto loans have been declining from year-ago levels since December 2019, and used car loan growth slowed last year, but has picked up in recent months. CUNA estimated that credit unions held $392.8 billion in auto loans, up 3.5% from a year earlier.

Among the Top 10, auto loans grew 8.5% to $49.1 billion as of June 30.

By contrast, Navy Federal held $19.1 billion in auto loans on June 30, up 18.8% from a year earlier. New car loans rose 19.5% to $8.3 billion, while used car loans rose 18.3% to $10.8 billion.

As part of an analysis by CU Times of results among the Top 10 credit unions, it reached out to Navy Federal for comment. A spokesperson emailed responses as seen below.

CU Times: Generally Navy Federal is doing better than others in Top 10. Navy Federal claimed $214 million as income for loan loss provisions in the quarter, compared with a provision expense of $779.4 million in 2020′s second quarter. What does this say about loan quality and expectations?

Navy Federal: Some of our members are experiencing more favorable economic conditions, resulting in lower loss expectations. Our forecasts indicate this trend could continue for our members.

CU Times: Your net interest income was basically running flat (it was falling for others). Why?

Navy Federal: Our net interest income has been supported by our lending and investment activity, as well as our early extinguishment of debt.

CU Times: Besides fees and the NCUA’s “Other Operating Income” line, the remainder of non-interest income was down by about $76 million, apparently some kind of one-time charge. What was that about?

Navy Federal: We incurred the expense as a result of the early extinguishment of debt.

CU Times: I see mortgage originations rising, but not as fast as in the first quarter. What trend are you seeing and why?

Navy Federal: We continue to see an improving economy. The low interest rate environment continues to drive increases to our volume of originations and refinances. However, many areas of the country where our members live and serve continue to experience inventory constraints, which could impact volume.

CU Times: I see non-real estate originations rising much faster than real estate originations, and I see your auto balances are also rising. How much is that related? Are you seeing a significant improvement in auto, and what do you attribute it to?

Navy Federal: We believe the increase in new and used auto loan originations reflects pent up demand from 2020, as people return to their workplace or look to replace their older vehicles they’ve been holding onto through the pandemic.