Net Interest Surge Covers Loan Loss Provisions for CUs
NCUA data for the fourth quarter shows little net change in earnings despite big movements.
NCUA data released Wednesday showed the swift rise in loan interest rates and the slower rise in savings rates allowed credit unions to maintain their earnings margins despite charging much larger loan loss provisions in the fourth quarter.
Credit unions earned $5 billion in the three months ending Dec. 31, or an annualized 0.92% of their average assets for the quarter. Their ROA was little changed from 0.91% a year earlier and 0.94% in the third quarter.
Overall, large gains in net interest income were approximately matched by the size of loan loss provisions credit unions chose to take.
Net interest margins were 3.07% of average assets in the fourth quarter, up 51 basis points from a year earlier and up 7 bps from the third quarter.
By comparison, loan loss provisions subtracted 31 bps from ROA from a year earlier and 7 bps from the third quarter.
Operating expenses were a minor factor, rising 7 bps from a year ago and 6 bps from the third quarter. Fee income fell by only 1 bps from either period.
Non-fee operating income, which includes unrealized losses on securities, was down 10 bps from a year earlier, but was up 9 bps from the third quarter.
Operating income, which replaces provisions with actual net charge-offs, was $5.4 billion in the fourth quarter, or an annualized 0.99% of average assets. Operating ROA was up from 0.81% a year earlier and down slightly from 1.00% in the third quarter.
However income is measured, larger credit unions earned more. Only the largest group increased ROA from the third quarter. Traditional ROA for asset classes designed to divide assets into three roughly equal groups was:
- 0.80% in the fourth quarter for “small” credit unions (less than $2 billion in assets), down from 0.94% a year earlier and 0.86% the third quarter.
- 0.96% in the fourth quarter for “medium-sized” credit unions ($2 billion to less than $7 billion), down from 1.10% a year earlier and 1.00% the third quarter.
- 1.02% in the fourth quarter for “large” credit unions ($7 billion or more), down from 1.30% a year earlier, but up from 0.97% the third quarter.
Despite the large interest margin gains, NCUA Chair Todd Harper warned that credit union rates on auto loans have been running 2 to 3 percentage points lower than for other lenders. “This could create long-term interest rate risks for your organizations,” he said during a call with the media Wednesday.
The net worth ratio for credit unions ended the year at 10.75%, up 48 bps from a year earlier and up 15 bps from Sept. 30. But Harper warned that household savings are dwindling and their debt is rising.
“We can see that with the loan to share ratio rising more than 10 percentage points over the fourth quarter in 2021,” Harper said.
Another concern has been the rapid rise in delinquency rates over the past year. The percentage of loans at least 60 days late was 0.61% Dec. 31, up from 0.49% a year earlier and 0.53% on Sept. 30. The net charge-off rate for the fourth quarter was 0.43%, up from 0.26% in 2021’s fourth quarter and 0.34% in the third quarter.
Much of the slippage in loan quality reflects a return to levels that existed before the abnormally low levels that prevailed early in the COVID-19 pandemic. But Harper said areas of particular concern are delinquency rates for auto loans and credit cards.
Growth in savings among credit unions has slowed. Credit unions have been slow to raise rates on regular shares and share draft accounts. NCUA officials said consumer savings are typically the last to see increases in rates.
Credit unions ended the year with $1.52 trillion in loans, up a record 20.5% from a year earlier and up from $1.47 trillion on Sept. 30.
NCUA Chief Economist Andy Leventis said the balance sheet has been pushed higher by growth areas including second-lien residential loans and auto loans.
“Credit unions have definitely gained market share over the past year” in many loan segments, Leventis said.
In part, Leventis said that reflects credit unions using members’ heavy savings during the pandemic to meet member lending needs in the aftermath.
While average loans per member rose 15% last year to $11,136, average shares per member fell 1% to $13,687.