Credit Union Losses Mount in Q1

The drop in non-fee operating income and lower mortgage originations brought down earnings for many credit unions in the first quarter, especially those with more than $1 billion in assets.

Overall, the first-quarter results were decent, but they marked the third quarter in a row of deterioration. Credit unions from coast to coast generated $4.6 billion in net income in the three months ending March 31, or an annualized 0.87% of average assets, down from 1.04% in 2021’s first quarter and 0.91% in the fourth quarter.

Also, more credit unions reported net losses. In the first quarter, 1,131 of the nation’s 5,007 credit unions had a loss, up from 1,044 in 2021’s first quarter.

Last year, all but two of the losses were among small credit unions (those with less than $1 billion in assets), and the exceptions were in medium credit unions ($1 billion to less than $4 billion in assets). In this year’s first quarter, 10 medium-size credit unions and one large credit union reported losses.

The largest loss was at Coastal Federal Credit Union, Raleigh, N.C. ($4.8 billion, 300,813 members). It lost nearly $6 million in the three months ending March 31, or an annualized 0.51% of its average assets. That is down from a $11.6 million gain (1.14% ROA) in 2021’s first quarter.

Unlike credit unions as a whole, Coastal FCU’s provision for loan losses was one contributor: It rose four-fold to $5.3 million, which the credit union said was an issue of strong loan growth, not performance. Also, last year’s provision was unusually low to compensate for overly aggressive provisioning at the start of the COVID-19 pandemic.

But an even larger factor was typical for most credit unions: a major drop in non-fee operating income, which includes gains on loan sales, and gains/losses from investments and interest-rate hedges.

Coastal FCU had $2.7 million in non-fee operating income in the first quarter, down by $12.3 million from a year earlier. Among all credit unions, non-fee income fell 42.8% to $453.2 million.

Tami Langton, Coastal FCU’s chief financial, risk and people officer, said its results reflect market fluctuations and a shift away from the sustained low interest rate environment of the past.

“Changing economic environments is a part of our business,” Langton said. “We constantly model various scenarios in different environments so that we can strategically pivot when necessary. And, we build up reserves for when these cycles change and new strategies are needed. We have now shifted our strategies and future financials will show associated improvements.”

The problem with non-fee operating income became apparent with CU Times’ report on the Top 10’s results. Executives at several of those credit unions said the market drop in late March caused them to record major drops in values of loans and other investments — paper losses that were likely to recover eventually.

They also said sales margins had declined for mortgage sales, and the volume of those sales had dropped.

That was reflected in the data the NCUA posted to its website June 7, which showed total first-quarter originations were $192.3 billion, up 6.5% from 2021’s first quarter, but residential real estate originations fell 3.1% to $73.3 billion.

Credit unions sold $17.6 billion in first mortgages on the secondary market in the first quarter, down 40.9% from a year earlier.

But the mortgage impact is greater on larger credit unions. While small credit unions account for 26% of the movement’s $2.14 trillion in assets, they accounted for only 18% of residential originations and 10% of mortgage sales. Large credit unions account for 44% of assets, but 53% of residential originations and 69% of mortgage sales.

The pattern can be seen in this summary:

• Small credit unions had first-quarter ROA of 0.63%, down 2 basis points. Total originations were $39.9 billion, up 5%, while residential real estate originations were $13 billion, down 9.5%. First-mortgage sales were $1.8 billion, down 62.3%.
• Medium credit unions had first-quarter ROA of 0.89%, down 8 bps. Total originations were $57.6 billion, up 8.1%, while residential real estate originations were $21.5 billion, down 4.2%. First-mortgage sales were $3.7 billion, down 59.4%.
• Large credit unions ($4 billion or more) had first-quarter ROA of 0.99%, down 33 bps. Total originations were $94.8 billion, up 6.2%, while residential real estate originations were $38.8 billion, down 0.1%. First-mortgage sales were $12.1 billion, down 23.9%.

And the mortgage market has not been improving in the second quarter.

On Wednesday, the Mortgage Bankers Association reported that the seasonally adjusted volume of applications for the week ending June 3 was 6.5% lower than the previous week. Its weekly survey found the refinance index was down 6% for the week and 75% for the year, while the seasonally adjusted purchase index fell 7% for the week and 21% for the year.

Joel Kan, the MBA’s assistant vice president of economic and industry forecasting, said weakness in both purchase and refinance applications pushed the market index down to its lowest level in 22 years.

“The purchase market has suffered from persistently low housing inventory and the jump in mortgage rates over the past two months. These worsening affordability challenges have been particularly hard on prospective first-time buyers,” Kan said.