Navy Federal, PenFed & BECU Explain Q1's Large Non-Fee Income Drop

A combination of a market slump in asset values and lower income on sales of first mortgages caused the massive drop in first quarter non-fee operating income, according to three of the 10 largest credit unions.

Annualized returns on average assets were a strong 0.95% for the Top 10, but the result was down from 1.43% ROA in 2021’s first quarter. In fact, ROA has been falling for the group each quarter since it reached 1.66% in last year’s second quarter.

Consider three big groupings of operating income:

• Fee income did well. It rose from 30 basis points in 2021’s first quarter to 34 basis points in this year’s first quarter.
• The biggest single factor in the overall 12-month drop of 48 basis points was a 39 basis point drop in what the NCUA calls “Other Income” in the operating income basket, or account “IS0020.” It contributed 45 basis points to this year’s first quarter, down from 85 bps a year earlier.
• After that come a number of other discrete subsets of operating income, which combined were worth 3 bps to the first quarter’s ROA, down from 10 bps a year earlier.

Non-fee operating income is the sum of those last two sets, and pushed the Top 10’s ROA down by 46 basis points.

Non-fee income fell 53% to $254.9 million for the three credit unions that responded by email to CU Times questions: Navy Federal Credit Union of Vienna, Va., the nation’s largest credit union with $160.4 billion in assets and 11.4 million members as of March 31; PenFed Credit Union of Tysons, Va. ($35.4 billion, 2.7 million members) and BECU of Tukwila, Wash. ($30.4 billion, 1.4 million members).

Officials at the credit unions said much of the decline came from non-realized losses as it marked down the value of loans and investment equities to reflect broad losses.

Navy Federal’s non-fee operating income fell from $380.7 million in 2021’s first quarter to $189.5 million in this year’s first quarter.

John Collins, CFO at Navy Federal, said non-fee operating income was reduced by market drops and lower margins on mortgage sales.

“Like many others in the industry, overall market and economic changes have impacted Navy Federal,” Collins said. “Equity markets have declined in value versus prior year. In addition, spreads on mortgages that we have sold have tightened.”

The largest drop in net income occurred at BECU, where first-quarter ROA was a scant 0.01%, down from 1.18% a year earlier. Its non-fee income fell 79% to $14 million from $68.2 million a year earlier.

Robert Gatlin, BECU’s vice president of financial planning and analysis, said that the falling assets included mutual funds in trust to pay employee benefits as well as mutual fund investments to fund charitable contributions as permitted by state and federal regulations.

“During Q1, the market for these investments declined significantly as did the entire stock and bond markets due to inflation concerns and the crisis in Ukraine,” Gatlin said. “We view these as long-term investments and recognize that short-term events will create volatility, but in the long run these investments will allow us to enhance our support to our communities and employees.”

BECU’s “Other” operating income category fell from $47.2 million in 2021’s first quarter to $24.4 million in this year’s first quarter. Gatlin said the main culprit was the drop in value of fixed-rate mortgages held at fair value as interest rates rose.

BECU uses derivatives (interest rate swaps) to reduce its sensitivity to interest rate changes. But despite a $16 million gain from those swaps, its first-quarter loss among the basket of miscellaneous operating income sources was $10.4 million, compared with a $21 million gain a year earlier.

PenFed’s non-fee operating income fell from $97.8 million in 2021’s first quarter to $51.4 million in this year’s first quarter. “Other” operating income fell from $105.2 million in 2021’s first quarter to $34.9 million in this year’s first quarter.

PenFed said the decline in “other” operating income represents its strategic decision to sell fewer mortgages than in 2021’s first quarter “due to the extreme market volatility.”

“As a result of the market disruption, we also saw a change in fair value that we believe is a result of the dislocated market and the fundamental characteristics of the loans are strong,” PenFed said.

PenFed also noted that its net interest income rose 75% to $304.3 million. The net interest margin rose from 2.58% of average assets in 2021’s first quarter to 3.10% in this year’s first quarter.

For the entire Top 10, net interest margins rose 7 bps to 2.94%.

Loan production also fell sharply from 2021’s first quarter — excluding PenFed.

PenFed has been ramping up its loan production over the past couple years with a strategy of selling many of them. It originated $11.6 billion in loans in the first quarter, slowing to a mere 125% increase from a year earlier.

The other nine credit unions in the Top 10 originated $30.1 billion in loans in the first quarter, down 9.5% from $33.3 billion a year earlier.