Two Big Credit Unions Hit by Falling Investment Values

Two of the nation’s largest credit unions followed the trend of others with declining earnings in the second quarter, but exceeded the pack with loan originations.

And, like the others, their earnings were strongly influenced by the declines early this year in investments, which caused them to make heavy “mark-to-market” subtractions to non-fee operating income.

One was Randolph-Brooks Federal Credit Union of San Antonio ($15.5 billion in assets, 1.1 million members), which was the nation’s 11th-largest credit union in the second quarter, dropping from No. 9 in the first quarter.

The other was BECU of Tukwila, Wash. ($29.5 billion, 1.4 million members), which is the nation’s fourth-largest credit union.

NCUA Call Report data showed the Seattle-area credit union had a $7.2 million net loss in the three months ending June 30, or an annualized -0.10% of its average assets. That compared with a $65.9 million net gain, or 0.92% ROA, in 2021’s second quarter and 0.01% ROA in the first quarter.

The 102 basis point drop in ROA from 2021’s second quarter to 2022’s second quarter can be summarized in five broad categories, with trends that were mostly similar to other credit unions in the Top 10 by assets:

• -33 basis points for loan loss provisions, which went from a clawback that boosted income by $10.5 million in 2021′s second quarter to a more normal $13.7 million expense in this year’s second quarter.
• -27 bps for higher operating expenses. Others in the Top 10 kept their operating expenses on par with average asset growth, meaning their expense gains had little effect on ROA.
• +37 bps as net interest margins rose from 1.98% in 2021’s second quarter to 2.35% in this year’s second quarter. This is the largest single income category for credit unions, and margin compression from low interest rates had kept this ratio down in the past couple years.
• +2 bps for higher fee income. This was a bigger positive factor for many other Top 10 credit unions.
• -81 bps for non-fee operating income. This is where “mark-to-market” write-downs get parked and have lowered ROA substantially in both the first and second quarters for many credit unions.

Robert Gatlin, BECU’s vice president of financial planning and analysis, said the drop in non-fee operating income reflects the drop in values in the equity and bond markets since early this year.

“As equity markets rebound off of their bear market lows we would expect unrealized losses to be minimal, if not improve,” Gatlin said.

BECU, like many large credit unions, had much prettier results for loan originations.

Although BECU’s first-mortgage originations fell 38% to $562.5 million, its other residential loans nearly tripled to $282.1 million. Add onto that commercial real estate lending rising nearly four-fold to $468 million, and non-real estate lending (mostly auto and other consumer loans) rising 18% to $1.9 billion.

As a result, total originations were $3.3 billion for the second quarter, up 23% from a year earlier and up from $2.8 billion in the first quarter.

“As expected with rising interest rates, mortgage volumes are down significantly from the prior year, and declined quarter over quarter, but have come in slightly higher than our outlook expected,” Gatlin said. “More than offsetting the decline in mortgage volume, consumer loan volume, which include auto originations, have come in strong both year over year and from the prior quarter, and also has come higher than our outlook expected.”

Deep in the heart of Texas, RBFCU had similar overall trends, but better ROA.

NCUA Call Report data showed RBFCU’s net income was $29.5 million for the second quarter, down 46% from 2021’s second quarter.

EVP/Chief Lending Officer Robert Zearfoss said RBFCU’s 46% drop in net income came from a $39 million drop in the value of equity and trading securities from the second quarter of 2021 to the second quarter of 2022, reflecting the market’s drop into bull territory early this year.

“When market rates begin to shift — and it is not just a change in market rates, but it’s the aggressiveness of the shift — it has a significant impact on the unrealized gain or loss on our investment portfolio,” he said.

“If we look at ‘organic net income,’ we saw an increase of 73% over the same period,” he said.

ROA was 0.76% for the second quarter, down from 1.61% a year earlier and down from 2.09% in the first quarter.

First-half ROA was 1.43%, compared with 1.83% a year earlier. But without the one-time, non-cash losses, Zearfoss said its ROA would have been 2.10% in this year’s first half.

By the same token, while total non-interest income in the second quarter fell 53% to $33.6 million, he said the cash component rose 30% from a year ago.

“Along with our checking account Courtesy Pay and NSF revenue, a big reason for the increase is debit interchange,” Zearfoss said. “Members have been spending money this year.”

Like BECU, RBFCU’s originations also looked better than earnings. Total originations were $1.8 billion in the second quarter, up 9.1% from a year ago. First-half originations rose 24% to $3.5 billion.

“Auto originations are up tremendously since last year,” Zearfoss said. “In 2021, we averaged about $150 million a month in originations. During 2022, we are averaging a little more than $200 million a month. We have seen a slight decrease in originations recently with the rise in rates.”

Residential loan originations were $515 million in the second quarter, up 1.2% from a year earlier. First-half residential loan originations rose 11.2% to $934.6 million.

“Refinances have basically disappeared, but that volume has been replaced with home equity transactions,” he said. “We are seeing a record number of home equity applications being received during most of 2022.”