Loan Production Falls for Largest Credit Unions in Q3
Top 10’s core earnings improve despite a drop in originations and eroding loan quality.
Loan production fell sharply in the third quarter for the nation’s largest credit unions. And while core operating income continued this year’s pattern of improvement, loan quality continued to slip from the unusually high quality of the pandemic era.
The Top 10 credit unions by assets generated $919.8 million in net income in the three months ending Sept. 30, or an annualized 0.95% of average assets, down from ROA of 1.38% in 2021’s third quarter and 0.96% in this year’s second quarter. Much of the change in ROA came from a sharp increase in loan loss provisions, which are prone to large fluctuations.
Credit union consultant Mike Higgins instead measures net operating income, in which net charge-offs replace loan loss provisions.
The annualized return on net operating income was 1.13% in the third quarter, up from 1.10% a year earlier and 0.96% in the second quarter as the rise in net interest income overcame investment losses and falling loan production.
Not only did residential loan originations fall, but so did non-real estate loans, which included auto loans as their biggest component.
Non-real estate loan production was $22.6 billion in the three months ending Sept. 30, down 27% from $25.1 billion in the second quarter and down from $30.9% from 2021’s third quarter.
The NCUA doesn’t collect data on auto loan originations, but automotive loan balances increased from both September 2021 and from June 2022.
The Top 10 held $23.9 billion in new car loans on Sept. 30, up 13.4% from a year earlier and up from $23 billion on June 30. Used car loans stood at $36 billion on Sept. 30, up 17.8% from a year earlier and up from $35.1 billion on June 30.
Residential real estate loan originations were $11.8 billion in the third quarter, down 33% from $17.6 billion a year earlier and $15.4 billion in the second quarter.
Non-fee operating income has been falling from an annualized 0.96% of average assets in 2020’s fourth quarter to 0.39% in this year’s third quarter. This included a -0.5% loss for investments and 0.44% gain for the NCUA’s “other operating expenses” line, which would include gains from mortgage sales.
The Top 10 sold $3.3 billion in first mortgages in the third quarter, down 58% from a year earlier, but up from $238.3 million in the second quarter.
“In ‘normal times’ the greatest amount of home sales occurs during the summer season, so it would make sense there is an increase (in mortgage sales) versus Q2, but I don’t think you could call it an upward trend. The year-over-year change is where the story exists,” Higgins said.
However, net interest income has risen steadily from 2.82% of average assets in 2021’s second quarter to 3.49% in this year’s third quarter.
Higgins said asset yields are most likely rising faster than funding costs.
For example, the Top 10’s credit card balances were $32.2 billion on Sept. 30, up 18% from a year earlier and up from $30.8 billion on June 30. “Those are normally higher yielding, which could be providing some lift too,” he said.
Some economists are predicting a recession early next year as the Fed continues its rapid rate hikes.
That would make loan quality a key issue. Lenders have had little reason to worry over the past two years as cash-flush borrowers lowered delinquencies and charge-offs to record lows.
“Asset quality is still strong, but I am still wary about it, especially if we fall into a recession where jobs are lost,” Higgins said. “When rates rise, you make more margin, but it comes at the expense of volume and other income. It’s a classic rate versus volume tradeoff.”
For the Top 10, loan quality has been eroding.
The Top 10 charged off an annualized 0.97% average loans in the third quarter, up 43 bps from 0.54% a year earlier and up from 0.74% in the second quarter.
The delinquency rate for the Top 10 was 0.92% as of Sept. 30, up 16 bps from a year earlier. It stood at 0.80% on June 30 and 0.68% on March 31.
The Top 10 accounted for $387.5 billion in assets and 25.1 million members on Sept. 30 – roughly 20% of those for all credit unions. Total loan production was $119 billion, down 12.7% from a year ago.
The make-up of the group did not change from the second quarter, but Alliant Credit Union of Chicago inched ahead of America First Federal Credit Union based near Salt Lake City. Here’s a summary of their results:
1. Navy Federal Credit Union, Vienna, Va. ($156.5 billion, 12.1 million members) had ROA of 1.16% in the third quarter, compared with 2.05% a year earlier. Originations were $46.4 billion, down 28.9%.
2. State Employees’ Credit Union, Raleigh, N.C. ($52.1 billion, 2.7 million members) had ROA of 1.19% in the third quarter, compared with 1.14% a year earlier. Originations were $9.9 billion, up 10%.
3. PenFed Credit Union, Tysons, Va. ($35.9 billion, 2.8 million members) had ROA of 0.81% in the third quarter, compared with 1.05% a year earlier. Originations were $20.3 billion, down 9.7%.
4. BECU, Tukwila, Wash. ($29.2 billion, 1.4 million members) had ROA of 0.05% in the third quarter, compared with 1.03% a year earlier. Originations were $8 billion, up 1%.
5. SchoolsFirst Federal Credit Union, Santa Ana, Calif. ($27.7 billion, 1.3 million members) had ROA of 0.8% in the third quarter, compared with 0.69% a year earlier. Originations were $6.4 billion, up 14%.
6. Golden 1 Credit Union, Sacramento, Calif. ($18.3 billion, 1.1 million members) had ROA of 0.68% in the third quarter, compared with 0.85% a year earlier. Originations were $5.8 billion, up 23.5%.
7. Alliant Credit Union, Chicago ($18 billion, 734,595 members) had ROA of 1.09% in the third quarter, compared with 2.05% a year earlier. Originations were $5.1 billion, up 20.5%.
8. America First Federal Credit Union, Riverdale, Utah ($17.6 billion, 1.3 million members) had ROA of 0.98% in the third quarter, compared with 1.83% a year earlier. Originations were $6.7 billion, down 15.7%.
9. First Tech Federal Credit Union, San Jose, Calif. ($16.4 billion, 646,500 members) had ROA of 0.22% in the third quarter, compared with 1.35% a year earlier. Originations were $4.6 billion, down 3.5%.
10. Suncoast Credit Union, Tampa, Fla. ($15.7 billion, 1.1 million members) had ROA of 0.95% in the third quarter, compared with 1.34% a year earlier. Originations were $5.7 billion, up 35.5%.