Earnings Glow as Originations Slow
Callahan analysts say the challenge for credit unions will be deciding how to spend earnings to expand their impact.
Analysts for the Washington, D.C.-based credit union company said the challenge for credit unions will be finding ways to invest their bounty not only to keep up with the rising minimum requirements to remain viable, but also to take risks calculated to widen their benefit to members and their communities.
Key findings from its quarterly Trendwatch report included:
- Net income was $22.4 billion for the three months ending Sept. 30, or an annualized 1.11% of average assets. The ROA was unchanged from the second quarter, which was the highest in at least this century.
- The net interest margin was 2.59%, up from 2.57% in the first and second quarters. Margins had been declining since hitting a peak of 3.19% in 2019’s fourth quarter.
- Loan loss provisions were $1.2 billion, or an expense that was an annualized 0.06% of average assets, compared with a historic $48.7 million gain in this year’s second quarter and a second quarter 2020 peak expense of $2.7 billion, or 0.64% of average assets.
- In loan originations, Callahan’s data showed the surge from the first quarter to the second was followed by a drop in first mortgages and much weaker gains in other major areas. Total originations grew a scant 0.2% in the third quarter.
- Consumer loan production grew 10.2% from 2020’s fourth quarter to this year’s first quarter and grew 14.8% in the second quarter, but rose only 1.5% in the third quarter. First mortgages fell 3% in the third quarter after an 8.3% gain in the second quarter.
Meanwhile, as CUNA has reported, savings are still high, but the quarter-to-quarter increases are falling closer to the six-year median of 1.6%. And loan balance growth is rising, although at a slower pace than before COVID-19 was declared a pandemic in March 2020.
The loan-to-share ratio had another slight rise from the previous quarter to 69.9% as of Sept. 30. It fell from a peak of 83.9% in 2019’s fourth quarter to a low of 68.7% in this year’s first quarter.
William Hunt, an industry analyst for Callahan & Associates, said 61% of members have a checking account, a record for credit unions and up from 56% five years earlier.
“This is the closest indicator we have that a member considers their credit union to be their primary financial institution, and not just a place to grab an auto loan and pay it off,” he said. “If your member has a checking account, they are banking with you.”
He added, “However, to throw a little bit of cold water on the party, credit union market share has declined across most loan products. Despite our record performance, banks and other lenders are performing even better.”
Both Hunt and co-presenter Alix Patterson, Callahan’s chief experience officer, said higher earnings and rising capitalization create an opportunity for credit unions to step up their game.
“Credit unions operate at the intersection of a market-driven and a purpose-driven economy,” Patterson said. “It can be very frustrating when you say you’ve had this record growth, but we’re missing market share.”
Hunt said the value of profits in a not-for-profit enterprise is their ability to help members and their communities.
Having high profit margins is not a reward, but a signal to step on the gas, especially when others are racing ahead.
“Businesses can only save on expenses for so long before starting to fall behind more innovative competition that might be investing in some more advanced delivery channels technologically or through their staff,” Hunt said. “With high earnings and low delinquencies, credit unions have some room to take calculated risks.”
He continued, “Technology is certainly one way to do that, and COVID certainly accelerated that development. Still, to put it bluntly, even having new technology delivery channels – that’s still kind of table stakes. Almost no one at this point is going to make a decision to join an institution because they have a mobile app or an online website. That’s kind of what you need to enter the game, especially for our younger members.”
Hunt and Patterson said credit unions need to focus on their purpose, what makes them different and telling that story to members and their communities.
“We can’t just make an impact,” Hunt said. “We have to let our members know that we are being purposeful and we are helping both their financial lives and the community as a whole.”