Loan freeze for top 10 credit unions in second quarter

The nation’s 10 largest credit unions posted better second-quarter profits than the first quarter, but were down from a year earlier, even after removing sharp swings in loan-loss provisions, a CU time the analysis showed.

The analysis also showed a stagnation in loan production. The Top 10 generated $41.9 billion in loans in the three months ended June 30, up slightly from $41.4 billion in the first quarter, but down 12% from to the previous year.

“The lending numbers are remarkable,” said Mike Higgins, a credit union consultant. “It’s the canary in the coal mine for economic activity.”

And while loan quality has generally been extraordinary over the past two years, it dropped into the Top 10 in the second quarter.

The Top 10’s 60-day default rate was 0.80% as of June 30, down from 0.73% a year earlier and 0.68% on March 31. Net write-offs for the three months ending June 30 were 0.74% annualized of average loans, down from 0.56% a year ago and 0.69% in the first quarter.

The Top 10 represent approximately 18% of all assets and membership in the credit union movement. Their results tend to be better than smaller credit unions, but the trends tend to be similar.

Together, they generated $932.4 million in net income in the second quarter, or 0.96% annualized of their average assets. This is up from the ROA of 0.88% in the first quarter, but 82 basis points lower than the ROA of 1.78% in the second quarter of 2021.

About 70 basis points of the decline came from a shift from $224 million in loan loss provisions that were recovered as revenue in the second quarter of 2021 to a provision charge of $438.8 million in second quarter of this year.

Bar chart showing revenue improving for the top 10 credit unions in the second quarter.

In the second quarter of 2021, Navy Federal Credit Union, the nation’s largest credit union, recovered $214.3 million in loan loss provisions as revenue. Four others have recovered $54.3 million.

But about 11 basis points of the decline came from lower net income.

Net interest margins increased by 31 basis points to 3.12% and commission income increased by 5 basis points. Higgins said the increase in net interest margins above 3% is significant.

Mike Higgin Mike Higgin

“The balance sheet tends to move more slowly, so the margin improvement should be sustainable for the foreseeable future. This is a good sign for earnings and capital,” he said.

Operating expenses were a minor factor in the decline in revenue, lowering ROA by just 1 basis point.

However, operating income excluding commissions fell by 47 basis points. As in the first quarter, the decline is explained by unrealized mark-to-market losses on investments compared to their value a year earlier.

In fact, eliminating paper losses would have turned a decline in net income into a gain at the Randolph-Brooks Federal Credit Union of San Antonio ($15.5 billion in assets, 1.1 million members).

RBFCU fell from the Top 10 this quarter to First Tech Federal Credit Union of San Jose, Calif. ($15.9 billion in assets, 636,707 members).

Chart illustrating the reduction in loan loss provisions in the second quarter earnings of the top 10 credit unions.

RBFCU’s second-quarter net income was $29.5 million, down 46% from the second quarter of 2021. Executive Vice President/CLO Robert Zearfoss said the removal of $39 million dollars of markdowns on stocks and trading securities in the second quarter would show a gain of 73% over the previous year.

Robert Zearfoss Robert Zearfoss

But if paper provisions are removed and replaced with net charges paid in cash, it generates a number that Higgins calls the operational ROA.

By this metric, Top 10 revenue is still down from the previous year, but the amount is lower. Operating ROA, which was 1.20% in the second quarter of 2021, converged with the standard ROA in the second quarter of this year at 0.96%.

One of the factors in the drop in income was the decline in mortgage sales.

The Top 10 sold $238.3 million worth of first mortgages in the secondary market in the second quarter, down 97% from a year earlier. In the first quarter, they sold $7 billion, up 11.4% from a year earlier.

And one of the reasons for the drop in sales was a drop in loan originations.

First mortgages have fallen the most as interest rates have risen this year and the refinance market has dried up. In the second quarter, the Top 10 generated $12.7 billion in first mortgages, down 25% from a year earlier and down 25% from $16.9 billion in the first quarter .

Home equity lending rose, but not enough for the group to offset the drop in first mortgages. The Top 10 generated $2.7 billion in second-tier privileges, up 29% from a year ago and 40% from $1.9 billion in the first quarter.

Combining the categories, total residential real estate starts were down 15% from a year earlier and 18% from the first quarter, which is generally slower for home sales.

Loans for everything else except real estate were down from a year ago, but up from the first quarter. The category primarily includes auto loans, but it also includes credit cards, unsecured personal loans, and a small amount for business loans that are not secured by real estate.

The Top 10 generated $25.1 billion in non-real estate loans in the second quarter, down 12% from a year earlier, but up 15% from the first quarter.

The credit unions in the Top 10 and their results were:

1. Federal Navy Credit Union, Vienna, Virginia ($159.7 billion, 11.8 million members) posted ROA of 1.22% in the second quarter, compared to 2.52% a year earlier and 1.05% in the first quarter. Arrangements totaled $18.3 billion, down 20.6%.

2. State Employees Credit Union, Raleigh, NC ($53 billion, 2.7 million members) had an ROA of 1.06% in the second quarter, compared to 1.18% a year earlier and 1.09% in the first quarter. Arrangements amounted to $3 billion, up 0.2%.

3. PenFed Credit Union, Tysons, Virginia ($36.7 billion, 2.8 million members) had an ROA of 1.04% in the second quarter, compared to 1.1% a year earlier and 0.9% in the first quarter. Arrangements totaled $5.6 billion, down 28.2%.

4. BECU, Tukwila, Washington ($29.5 billion, 1.4 million members) had an ROA of -0.1% in the second quarter, compared to 0.93% a year earlier and 0.01% in the first quarter. Arrangements amounted to $3.3 billion, up 23.4%.

5. SchoolsFirst Federal Fund, Santa Ana, Calif. ($28.1 billion, 1.2 million members) posted ROA of 0.76% in the second quarter, compared to 0.61% a year earlier and 0.62% in the first quarter . Arrangements totaled $2.4 billion, up 22.3%.

6. Golden 1 Credit Union, Sacramento, Calif. ($18.5 billion, 1.1 million members) had an ROA of 0.65% in the second quarter, compared to 1.09% a year earlier and 0.68% in the first quarter. Arrangements amounted to $2.2 billion, up 25.3%.

7. America First Federal Credit Union, Riverdale, Utah ($17.5 billion, 1.3 million members) had an ROA of 0.97% in the second quarter, compared to 1.89% a year earlier and 0.89% in the first quarter. Arrangements amounted to $1.6 billion, down 43.7%.

8. Alliant Credit Union, Chicago ($16.4 billion, 694,474 members) had an ROA of 1.27% in the second quarter, compared to 2.09% a year earlier and 1.17% in the first quarter. Arrangements amounted to $1.9 billion, up 25.2%.

9. First Tech Federal Credit Union, San Jose, Calif. ($15.9 billion, 636,707 members) had an ROA of 0.2% in the second quarter, compared to 2.21% a year earlier and 0.3% in the first quarter. Arrangements amounted to $1.6 billion, down 4.9%.

10. Suncoast Credit Union, Tampa, Florida ($15.8 billion, 1.1 million members) had an ROA of 0.79% in the second quarter, compared to 1.43% a year earlier and 0.97% in the first quarter. Arrangements amounted to $2 billion, up 26.4%.

About Wanda Wall

Check Also

Dividend announcement BORT $0.1850/share 07/28/2022

Bank of Botetourt Buchanan VA (OTCBB:BORT) on 07/28/2022 declared a dividend of $0.1850 per share …