PenFed Loses $65 Million in Q4

Pentagon Federal Credit Union of Tysons, Va., lost $65.3 million in the fourth quarter, as it ratcheted up loan loss provisions and net revenue fell.

NCUA posted the Call Report for PenFed ($34.8 billion in assets, 2.9 million members) late Tuesday. It showed the net loss for the three months ending Dec. 31 was an annualized -0.74% of average assets, down from ROAs of 0.40% a year earlier and 0.57% in the third quarter.

The provision for loan losses was $176.7 million for the fourth quarter, up from $99 million a year earlier and $83.1 million in the third quarter.

PenFed said it made a one-time adjustment to its charge-off policy and built in an 8.08% coverage ratio on its commercial portfolio in the fourth quarter by adding more than $72.6 million in reserves.

PenFed’s commercial loan portfolio stood at $1.8 billion Dec. 31, up 3.7% from a year earlier. Loans 60-days-plus delinquent were $46.1 million, or a 2.58% delinquency rate, down from 3.52% a year earlier and slightly down from September.

For all types of loans, PenFed made $421 million in loan loss provisions for the full year of 2023.

“We chose to be proactive in building reserves during 2023,” President/CEO James Schenck told CU Times Wednesday. “We see the rate cycle nearing the peak and flat to down in 2024.”

Its net operating income, which replaces provisions with actual net charge-offs, was further in the red. The net operating loss for the fourth quarter was $120.8 million, or an annualized -1.38% of average assets, down from positive operating ROAs of 0.54% a year earlier and 0.55% in the third quarter.

The operating losses reflect $232.1 million in net charge offs in the fourth quarter, up from $86.1 million a year earlier and $182.5 million in the third quarter. It included net charge offs of $107.7 million for cars, $47.4 million for credit cards and $60 million for other consumer term loans.

The overall net charge off rate was 3.19% in the fourth quarter, up from 1.16% a year earlier and 2.47% in the third quarter.

A news release from PenFed Wednesday said PenFed focused on building capital in 2023 while implementing the current expected credit loss (CECL) model and building reserves to account for future loan losses.

“Loan loss rates increased in 2023 as PenFed revised its loan charge-off policy. Several loan portfolio charge offs occurred between September and December upon adoption of the policy,” the news release said.

For the full year, operating ROA was -0.37%.

“With the increased 4Q 2023 charge-offs resulting from the adoption of our revised charge-off policy, we expect to see the corresponding recoveries occur in 2024,” Schenck said.

Beyond policy, there are payment issues.

While unemployment is near record lows and unemployment is subsiding, Schenck said many borrowers are still having financial difficulty.

“Pay increases have not kept up with increases in housing, energy and car ownership costs during the past three years. The average American consumer is worse off. The one tailwind is unemployment,” he said. “That is why PenFed is being proactive in building capital, reserves and liquidity to be able to weather any headwinds.”

PenFed ended 2023 with $3.2 billion in net worth. NCUA lists PenFed’s net worth ratio at 9.18% as of Dec. 31, down from 9.52% a year earlier and 9.75% on Sept. 30. Its applicable Risk-Based Capital Ratios are higher, standing at 12.41% Dec. 31.

Meanwhile, total loan originations were $1.4 billion in the fourth quarter, down 15.4% from a year earlier and down 18% from the third quarter.

Net revenue was $319 million in the fourth quarter, down 9% from a year earlier and down 3% from the prior quarter.

A big chunk of the decline came from net interest income, which fell $21.6 million from a year earlier and $15.5 million from the prior quarter. Its net interest margin was 2.85% for the fourth quarter, down from 3.04% a year earlier and 3.00% in the third quarter.

PenFed cut salary expenses by $67.3 million, or 15%, and other overhead by $55 million, or 11%, for the full year. NCUA data shows part of that reduction came as PenFed cut the equivalent of 825 full-time jobs, or 21% of its workforce, from September 2022 to September 2023. Its December call report showed 61 more full-time jobs were cut from September to December.

Other parts of PenFed’s December report were positive:

• There’s nothing like massive write-offs to improve delinquency rates. The 60-day-plus rate ended the year at 1.19%, which is higher than the credit union average but down from 1.58% a year earlier and 1.52% in September.
• Shares and deposits were $29.5 billion on Dec. 31, up 6.4% from a year earlier and up 2.1% from the previous quarter.
• Its loan-to-share ratio ended the year at 98.1%. While that’s way above the credit union average, it’s down from 107.3% a year earlier and 101.5% on Sept. 30.
• PenFed said its external borrowings fell by $1.9 billion from December 2022, “as external borrowings were replaced with member share deposits, driven by offering great rates to our members.”
• PenFed said its total cash and investments rose to 11.2% of total assets, an improvement of 1.3% year-over-year.