Credit Union Q4 Income Drops Across the Board

Credit unions banked on their loan quality to bolster earnings in the fourth quarter even as income dropped across the board.

NCUA data released Monday showed credit unions generated $4.7 billion in net income in the three months ending Dec. 31, down 14.9% from the third quarter and up 23.7% from a year earlier. The returns were an annualized 0.91% of the fourth quarter’s average assets, matching Callahan & Associates’ estimate from its Feb.16 Trendwatch report.

ROA was down from 1.09% in the third quarter and up from 0.83% in 2020’s fourth quarter.

As usual, ROA climbed with size. One chief difference was that first-mortgage originations fell about 19% for small credit unions, fell 5% for mediums and rose 12% for big ones.

The comparisons from a year ago would have looked worse but for loan loss provisions that were unusually low in the second half of 2021.

The low provisions reflected loan quality that has remained exceedingly good, although delinquencies and charge-offs ticked up from the third to the fourth quarter.

Loans at least 60 days late were just 0.49% of the balance at the end of 2021, up from 0.46% on Sept. 30 and down from 0.60% at the end of 2020. The net charge-off rate for the fourth quarter was 0.26%, up slightly from 0.23% in the third quarter, but down from 0.35% in 2020’s fourth quarter.

Credit unions originated $201.7 billion in loans in the fourth quarter, down 2.5% from the third quarter and 13.1% more than in 2020’s fourth quarter. Production of non-real estate loans, including auto loans, was $107.9 billion, down 6.8% from the third quarter and up 21.5% from a year earlier.

Credit unions originated a near-record $80.5 billion in first mortgages in the fourth quarter, up 2.8% from the third quarter and up 0.6% from 2020’s fourth quarter.

The slowdown from the refi boom is apparent, but not as stark as the Mortgage Bankers Association said it expects for the market as a whole. It estimated first-mortgage originations for the fourth quarter were $893 billion among all lenders, 7% lower than the third quarter and 34.2% lower than a year earlier.

While credit union first-mortgage originations slowed, second liens grew 41.1% to $13.2 billion. Those sets included real-estate-backed commercial loans, which grew 44.3% to $11.1 billion while the residential remainder grew 1.1% to $82.6 billion.

Income fell in each of the three broad areas after being weighted for average asset growth:

• Net interest income, which had increased slightly from the second quarter to the third quarter, resumed its decline. Net interest income was $13.2 billion, or 2.57% of average assets, down 2 bps from the third quarter and down 10 bps from a year earlier.
• Fee income was $2.4 billion, or 0.47% of average assets, unchanged from the third quarter and down 2 bps from a year ago.
• All other operating income was $4.1 billion, or 0.81%, down 8 bps from the third quarter and down 12 bps from a year earlier.

One reason for the drop in other operating income was lower sales of first mortgages to the secondary market. Credit unions sold $23.8 billion in first mortgages in the fourth quarter, down 13.3% from the third quarter and down 30% from a year earlier.

As a percent of first mortgage originations, sales have been declining since a peak of 43.4% in 2019′s third quarter. Sales were 29.6% of originations in the 2021′s fourth quarter, down from 35% in the third quarter.

Credit unions kept costs in line. Whether by choice or by turnover, their number of employees grew slower than membership, and pay and benefits grew at a pace close to average assets.

Credit union membership grew 4.6% to 131 million, while full-time equivalent employees grew 3.5% to 327,218. There were 400 members for every full-time equivalent at the end of the year, up 1.1% from a year earlier. Employee pay and compensation as a percent of total non-interest expense was 51.3% in the fourth quarter, down from 51.6% in the third quarter and 52.2% a year earlier.

Meanwhile, mergers reduced the number of credit unions to 5,048 at the end of 2021, and the pace is likely to take the number below 5,000 early this year. The number dropped by 47 since Sept. 30 and by 160 since the end of 2020.