Like Many Credit Unions, BECU’s Loans Shrink in the Third Quarter

The credit union had big gains in originations and strong earnings, but its loan portfolio shrank in the third quarter.

That’s likely to describe many credit unions. In this case it applied to BECU, the nation’s fourth largest credit union, based on its $29.6 billion in assets as of Sept. 30. BECU is based in Tukwila, Wash., a small municipality in the Seattle metro area. In the past year, its membership has grown 4.4% to 1.3 million.

BECU provided comments on its earnings via email from Robert Gatlin, BECU’s vice president of financial planning and analysis.

Its net income for the three months ending Sept. 30 was $70.7 million, or an annualized 0.97% of its average assets. That compared with 0.93% in the second quarter and 1.20% a year ago. Among the Top 10 credit unions, its earnings ranked near the middle of a group that ranged from 0.37% for First Tech Federal Credit Union of San Jose ($14.7 billion, 652,828 members) to 1.77% for Navy Federal Credit Union of Vienna, Va. ($151 billion, 10.9 million members).

In the past year, BECU’s net income dropped 6.7%, but Gatlin said a bigger impact on ROA was a 15% gain in average assets.

BECU’s car loan portfolio was stable at $2.6 billion from the second to the third quarter, and was down 5.8% from a year earlier. The pattern at BECU was similar to credit unions as a whole: New car loans have been falling from 2020 levels, while used car loans have been gaining.

“We have seen strong overall auto lending volume,” Gatlin said. “The story behind the numbers is prepayments, which have been well above historical norms for over a year. We believe members are flush with liquidity and have the ability to pay down existing loans.”

Another similarity with overall trends was net interest margins, which have been falling for the past two years.

BECU’s net interest income (before loan loss provisions) was $144.2 million in the third quarter, or an annualized 1.98% of its average assets. That was down from 1.99% in the second quarter, 2.48% a year ago and 3.06% two years ago.

“Net Interest Margin (NIM) has been declining while net interest income has been increasing each quarter of 2021. The primary cause of the NIM decline has been the continued growth in deposits, which goes into lower yielding investments/cash, which diluted the percentage,” Gatlin said.

NAFCU Chief Economist Curt Long said last month that he expects net interest margins to bottom out by the fourth quarter, but remain low for a while. For the Top 10, it was 2.89% in the third quarter — slightly higher than the past three quarters, but below the 3.45% level of two years ago.

BECU’s total originations for the three months ending Sept. 30 were $2.9 billion, up 11% from the second quarter and up 33% from a year ago. However, the total loan balance was $12.7 billion on Sept. 30, down 6.1% from a year earlier.

Residential real estate originations were $967.9 million, up 10% from the second quarter and up 38% from a year ago. However, the balance fell 12% over 12 months to $6.1 billion as of Sept. 30. Like many credit unions, secondary market sales are a major factor.

“Real estate originations have been strong through Q3, but we have elected to sell a significant amount to the secondary market rather than retain them in portfolio, given strong secondary market pricing,” Gatlin said.

BECU’s first mortgage sales into the secondary market surged in 2020’s second quarter, but have been tapering off for the past year. Sales accounted for 53% of first mortgage originations in the first half, but only 35% in the third quarter.

BECU sold $364.2 million of its first mortgages into the secondary market during the third quarter, down 20% from the second quarter and down 29% from a year ago.

Residential second lien real estate loans stood at $1.5 billion on Sept. 30, down 0.8% from the second quarter and 15% from a year ago. “Home equity balances have been pressured due to strong mortgage refi trends given low interest rates in 2021 through Q3,” Gatlin said.

Similar patterns held for non-real estate categories:

• Non-real estate production was $1.8 billion, up 8.3% from the second quarter and up 19% from a year ago. The balance fell 4% to $4.4 billion.
• The balance on credit cards was $1.1 billion on Sept. 30, unchanged from June 30 and down 3.1% from a year ago.
• Paycheck Protection Program loans are being quickly forgiven, as planned. BECU’s balance was $36.1 million on Sept. 30, down 53% from three months earlier and down 62% from a year earlier.
• Unsecured personal loans (minus PPP loans) were $275 million on Sept. 30, up 2.5% from June 30 and down 6.7% from a year ago.

An exception was commercial real estate production, which was $191.5 million in the third quarter, up 60% from the second quarter and up 16 fold from a year ago. The balance grew 11% to $2.2 billion.