Credit Union Margins Fall in Q1 Due to Big Changes in Lending Portfolio
Callahan & Associates finds higher interest rates and lower loan payoffs are behind many of the changes.
Callahan & Associates reported Wednesday that credit union net income margins fell in the first quarter as inflation, rising interest rates and diminished loan payoffs changed the dynamics of their operations.
First-quarter credit union net income was 0.86% of average assets, down from a peak of 1.04%% a year earlier and 0.91% in the fourth quarter.
In the Washington, D.C., based company’s first-quarter Trendwatch webinar, Jay Johnson, chief collaboration officer, and Will Hunt, industry analyst, described major reversals that have occurred in the past year:
- The growth rate for loans doubled, while the growth rate for savings was half the rate of a year ago.
- Loan originations for real estate were flat, while other loans rose 11%.
- Net interest margins, which had been falling in 2020, were unchanged from a year ago.
“We’re starting 2022 very differently than we started 2021,” Johnson said.
Jason Haley, chief investment officer for ALM First of Dallas, said the current environment of rising interest rates makes deposits more important, raises net interest margins and causes higher unrealized losses for core available-for-sale bond portfolios, although these paper losses go away with time.
Callahan found credit unions held $1.32 trillion in loans as of March 31, up 11.7% from a year earlier. From March 2020 to March 2021, the loan portfolio grew only 4.3%.
Savings grew 9.3% to $1.87 trillion in the 12 months ending March 31. It was the first time loan growth had exceeded share growth since 2019. Savings had spiked in 2020 as the COVID-19 pandemic began, and in March 2021 were 23.1% higher than in March 2020.
Savings is “getting to a more normal rate of growth,” Johnson said.
Total loan production grew 6.1% to $192.8 billion, compared with a year earlier when it grew 30.7% to $181.7 billion.
Hunt said much of the growth has come from higher prices. The total number of loans produced in the quarter was down 22% from a year earlier.
“That’s a big decline in the total pipeline,” Hunt said. “A lot of people are being priced out of the real estate market because of these high prices.”
Despite the slower growth rate for loan production, more of the originations stuck on the balance sheet.
Will Hunt said the 11.7% loan portfolio growth rate is partly the result of the economic environment and partly the result of strategic decisions. Loan production continues to be strong, Hunt said. “What is changing is the how and type of loans.”
Those changes include:
- A change in loan types. As first mortgages have flattened, consumer loans have strengthened, Hunt said.
- More indirect lending. Indirect lending waned in 2018 and 2019, but grew in the first quarter at the fastest annual rate since 2017. About 60% of the auto loan portfolio in March was from indirect lending.
- Lower loan payoffs. Members are no longer paying down their credit cards and home equity lines of credit as aggressively as they did a year ago when their cash was bolstered by a series of federal stimulus payments.
- Lower mortgage sales. Credit unions are selling fewer mortgages into the secondary market than they did a year ago when rates were lower. For one thing, transaction volume is lower, so they have fewer to sell. For another, the margins on sales are lower, limiting the cash benefits.
Credit unions sold about 40% of first mortgage originations to the secondary market in 2020 and 2021, but sold only 30% in the first quarter.
“Credit unions are portfolioing more of those real estate loans,” Hunt said.
Net interest margins were 2.57% of average assets in the first quarter, unchanged from a year earlier and 2021’s fourth quarter.
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