Credit Unions Widened Interest Margins in Q3
But, credit union consultant wonders if loans will be priced high enough to cover the fast-rising rate of interest expenses.
Credit unions improved their earnings from the second quarter with a major boost in net interest, despite lower loan volume and higher operating expenses.
First mortgage originations took the biggest dive, but growth in non-real estate loans, which includes cars, showed slower growth.
Credit union consultant Mike Higgins Jr. said he was encouraged by continuingly high operating earnings, strong loan balance growth and the widening of interest margins. However, he was concerned by a drop in savings, heavier losses from the declining values of assets available for sale and whether fixed-rate loans were being priced high enough to cover rising interest expenses.
Credit unions generated $5.1 billion in net income in the three months ending Sept. 30, or an annualized 0.94% of average assets, down from an ROA of 1.09% a year earlier and 0.82% in the second quarter.
One factor was higher provisions for loan losses. They were $1.6 billion in the third quarter, up six-fold from $260.7 million in last year’s third quarter and $993.1 million in this year’s second quarter.
Because of that kind of fluctuation, Higgins prefers to look at operating income, which uses actual net charge-offs instead of loan loss provisions. The operating income ROA was 1.00% for the third quarter, down from 1.01% a year earlier and up from 0.82% in the second quarter.
Charge-offs also rose. The net charge-off ratio was 0.34% for the third quarter, up from 0.34% a year earlier and 0.29% in this year’s second quarter. The 60-day-plus delinquency rate was 0.53%, up from 0.46% in last year’s third quarter and 0.48% in this year’s second quarter.
Expenses for employees and overhead rose slightly, each trimming 5 basis points from earnings from the second quarter of 2022 and third quarter 2021.
Net revenue showed improvement. It was $25.5 billion for the third quarter, up 5.6% from a year ago and up from $22.3 billion in the second quarter. The only factor in that growth was net interest income, which was $16.3 billion, up 25.6% from a year ago and up from $13.1 billion in the second quarter.
Fee income and “other (operating) income” were stable. The remainder in the operating income category, which includes investments available for sale, had losses of $134.7 million in the third quarter, compared with a gain of $238.9 million in 2021’s third quarter and a loss of $22.6 million in the second quarter.
Shares and deposits stood at $1.88 trillion on Sept. 30, up 6.8% from a year earlier, but down slightly from $1.87 trillion three months earlier.
Higgins said relationship shares (regular, draft, money market and health savings) declined this quarter —the first time since 2007 when the Fed Funds Effective Rate was running at 5.25%.
In email comments to CU Times, Higgins wondered if these deposits were flowing to banks, neo-banks, brokerage houses or higher-yielding certificates. He also wondered if inflation is eating up members’ personal reserves.
“Net interest margin improved nicely this quarter, but it was mostly driven by higher loan-to-asset ratio (higher percentage of assets earning loan yield instead of surplus funds yield) and significant increase in surplus funds yield,” Higgins said.
“Loan yield improved 18 bps this quarter, nice, but cost of funds rose 15 bps, so almost a dead match there. I would hope to see loan yield moving faster,” he said. “Enough yield is required today to cover rising cost of funds in future periods.”
Higgins said most of the loan growth occurred with vehicle and first-mortgage loans, which tend to be fixed rate.
The “Fed Funds Effective Rate has risen 380 bps in just nine months. In the last two rates up cycles, it took 2.0 and 2.5 years respectively to see that much movement,” he said.
While savers tend to be slow to react to rising rates initially, they tend to respond faster in later stages “; when rates move enough people start to pay more attention to what they are earning,” Higgins said.
“Is it possible that we have jumped over early rate cycle inelasticity and into late cycle repricing to hold deposits?” he asked.
“Up 380 bps in nine months should get the attention of a lot of consumers and businesses,” he said. “If credit unions are booking fixed rate loans today and yield has only moved 18 bps, is that enough to cover rapid increases in cost of funds in future periods?”