Harper: Credit Union Q2 Performance Good ‘Overall’

Credit unions managed to maintain high net interest margins and gained non-interest income in the second quarter despite a large drop in loan production from a year earlier and a drop in savings from the first quarter.

But the view from 30,000 feet is greener than some details on the ground, where liquidity constraints appear to be forcing some credit unions to sell loans at losses.

In comments to reporters Thursday as the agency released second-quarter data, NCUA Chair Todd Harper said the overall numbers looked good, but he was worried about the drop in savings and the worsening of credit quality, especially among some credit unions already faced with tight liquidity.

Chief Economist Andy Leventis said loan quality is worsening from unusually high quality during the pandemic when many Americans were flush with cash. Delinquency and charge-off rates are “still in the range of normal, but the trajectory is a little bit worrying,” Leventis said.

The 60-day-plus delinquency rate was 0.63% on June 30, up from 0.48% a year earlier and up from 0.52% on March 31.

Charge-offs were $2.6 billion during the second quarter, 83% higher than a year earlier and up 8.3% from the first quarter. The net charge-off rate was 0.54% for the second quarter, up from 0.29% a year earlier and 0.52% in the first quarter.

A CU Times analysis of NCUA data released Thursday showed credit unions earned $4.3 billion in the three months ending June 30, or an annualized return of 0.77% of average assets. That was down from ROA of 0.82% a year ago and 0.81% in the first quarter.

Expenses rose sharply from a year earlier, but little since March.

The biggest change over 12 months was an increase in net interest margins from 2.44% in 2022′s second quarter to 3.00% in this year’s second quarter. The next biggest change was credit unions deciding to make heavier provisions for loan losses.

Their net operating income ratios, which replace loss provisions with actual net charge-offs, were 0.84% in the second quarter, up from 0.82% a year earlier and 0.85% in the first quarter.

Credit unions demonstrated that resilience even as total loans originated fell 32% from a year earlier to result in production of $148.2 billion in the second quarter. Those originations were up 9.5% from the first quarter.

The gain from the first quarter was mainly from consumer lending, a huge leftover calculated from available NCUA data by subtracting all commercial lending and all residential real estate. A big chunk is auto loans, and the rest includes credit cards and personal loans.

Consumer loan production was $98.8 billion in the second quarter, up 15.4% from the first quarter, but down 24% from a year earlier.

The gain from the first quarter was also goosed by small gains for home equity lines of credit, other residential second liens and commercial loans (including the small amount of loans not backed by real estate). Second liens and commercial loans were down sharply from a year earlier.

As reported by Callahan & Associates in August, first mortgage originations fell from both a year ago and the first quarter.

Credit unions sold $7.3 billion in first mortgages to the secondary market in the second quarter, down 4% from a year earlier, but up 62% from the first quarter.

That sounds sort of good, but some details are unsettling. For example, the third- and fourth-largest sellers of first mortgages also had large losses from sales.

Greenstate Credit Union of North Liberty, Iowa ($11.2 billion, 447,519 members) sold $410.6 million in first mortgages in the second quarter, more than four times its sales a year earlier. It lost $12 million on loan sales, contributing to an ROA of 0.40% and operating ROA of -0.59%.

Local Government Federal Credit Union in Raleigh, N.C. ($4 billion, 402,745 members) sold $253.3 million in first mortgages in the second quarter, compared with none a year earlier. It lost $6.9 million on loan sales in the second quarter, and had a net loss with ROA of -0.88% and operating ROA of -0.60%.

The NCUA’s data covered the nation’s 4,787 credit unions, which had 139.1 million members on June 30, up 4.6% from a year earlier and up 0.8% from March. Other highlights from the NCUA data included the following:

• Total shares and deposits were $1.9 trillion on June 30, up 1.8% from a year earlier and down 0.5% from March.
• The average shares per member was $13,640 on June 30, down 2.6% from a year earlier and down 1.4% from March.
• The average loan balance per member was $11,336 on June 30, up 8.3% from a year earlier and up 1.3% from March.
• Credit unions had 350,488 full-time equivalent employees June 30, up 4.6% from a year earlier and up 0.6% from March.