Credit Union Results Tanked in Q4: A Closer Look Why

The three main components of income all turned for the worse from 2022’s fourth quarter to 2023’s fourth quarter: Net revenue fell, expenses rose and provisions skyrocketed.

Credit unions generated $2.74 billion in net income in the three months ending Dec. 31, or an annualized 0.48% of average assets. ROA was down from 0.92% in 2022’s fourth quarter and 0.67% in the third quarter.

A CU Times analysis found one in four credit unions reported a loss in the fourth quarter with 18 reporting losses of greater than $10 million for the three months.

In an NCUA press call timed with the fourth quarter data’s release Tuesday, Kelly Lay, director of NCUA’s Office of Examination & Insurance, said CAMELS ratings have fallen into the worst levels (ratings of 3 to 5 in the 5-point system) for an increasing number of credit unions. That typically means the NCUA will take actions including issuing Documents of Resolution outlining corrective actions for credit unions.

The NCUA data showed credit union loan-making slowed and more of the loans on the books soured than in earlier quarters.

Net charge-offs were $3.1 billion in the fourth quarter, or an annualized 0.77% of average loans. The net charge-off ratio rose from 0.43% in 2022’s fourth quarter and 0.61% in the third quarter.

And if delinquencies hint at the future, expect more pain. The 60-day-plus delinquency rate was 0.83% at Dec. 31, up from 0.61% a year earlier and 0.72% in September. Credit cards and used cars continued to lead the condition.

So credit unions provisioned $3.8 billion against future loan losses, nearly double the provisions they took in 2022’s fourth quarter and $1 billion more than they took in the third quarter. Provisions for loan losses have been rising steadily since the fourth quarter of 2021, but the increase was particularly large from the third quarter’s 0.51% of average assets to the fourth quarter’s 0.68% of average assets.

Then income and expenses contributed their smaller shares of misery.

• The net interest margin was 3.00% in the fourth quarter, down from 3.01% a year earlier and 3.02% in the third quarter. The net interest margin has been at or above 3% for the past six quarters after ranging from 2.86% in the second quarter of 2020, at the start of the pandemic, to 2.44% in the second quarter of 2022.
• Fee income has dropped precipitously at some credit unions, but overall as a percent of average assets, it has held steady between the fourth quarter’s 0.44% to 0.47% in 2022’s second quarter.
• Non-fee operating income was 0.66% in the fourth quarter, down from 0.70% a year earlier and 0.64% in the third quarter.
• Employee compensation and benefits were 1.54% in the fourth quarter, up from 1.50% a year earlier and 1.51% in the third quarter.
• Non-employee overhead was 1.48% in the fourth quarter, up from 1.44% a year earlier and 1.42% in the third quarter.

Rising loan rates increased net interest margins by about 50 basis points since early 2022, when the Fed began raising rates. Rates remain high, but originations have fallen while credit unions had to start paying members more to keep and attract their savings.

Another cost is increased borrowing. Interest on borrowings was $1.71 billion in the fourth quarter, up 79% from a year earlier.

And loan income is stressed.

Overall loan originations were $124.6 million in the three months ending Dec. 31, down 22% from a year earlier and down 12% from the third quarter.

All major categories were down from a year ago, except home equity lines of credit and other second liens on residential property. Second liens rose 1% from a year earlier, but were down 9% from the third quarter.

First mortgages, consumer loans and commercial loans were each down more than 20% from a year ago.

The consumer loan category, which includes auto loans, credit cards and personal loans, was $78 million, down 11% from the third quarter.