Credit unions widened interest margins in the third quarter

Chart showing credit union profits increased from second to third quarter

Credit unions improved their earnings from the second quarter with a big boost in net interest, despite lower loan volume and higher operating expenses.

First mortgage originations suffered the biggest drop, but non-real estate loan growth, which includes autos, showed slower growth.

Credit union consultant Mike Higgins Jr. said he was encouraged by continued high operating profits, strong loan balance growth and widening interest margins. However, he was concerned about a drop in savings, further losses from declining values ​​of available-for-sale assets, and whether fixed-rate loans were priced high enough to cover rising interest expenses.

Credit unions generated $5.1 billion in net income in the three months ended September 30, or 0.94% annualized of average assets, down from a ROA of 1.09% a year earlier and 0 .82% in the second quarter.

One factor was higher loan-loss provisions. It was $1.6 billion in the third quarter, six times more than $260.7 million in the third quarter of last year and $993.1 million in the second quarter of this year.

Graph showing loan production fell for credit unions in the third quarter

Because of that kind of fluctuation, Higgins prefers to look at operating income, which uses actual net write-offs rather than loan loss provisions. ROA from operating income was 1.00% in the third quarter, down from 1.01% a year earlier and 0.82% in the second quarter.

Cancellations also increased. The net cancellation ratio was 0.34% for the third quarter, compared to 0.34% a year earlier and 0.29% in the second quarter of this year. The delinquency rate of more than 60 days was 0.53%, compared to 0.46% in the third quarter of last year and 0.48% in the second quarter of this year.

Employee and general expenses rose slightly, each cutting 5 basis points from second-quarter 2022 and third-quarter 2021 earnings.

Net income showed an improvement. It was $25.5 billion for the third quarter, up 5.6% from a year ago and over $22.3 billion in the second quarter. The only factor in that growth was net interest income, which was $16.3 billion, up 25.6% from a year ago and $13.1 billion in the second quarter.

Fee income and “other (operating) income” were flat. The remainder in the operating income category, which includes available-for-sale investments, had a loss of $134.7 million in the third quarter, compared to a gain of $238.9 million in the third quarter of 2021 and a loss of $22 .6 million in the second quarter.

Chart showing high interest income boosted credit union profits in Q3

Shares and deposits stood at $1.88 trillion on September 30, up 6.8% from a year earlier but slightly down from $1.87 trillion three months earlier.

Higgins said the ratio stocks (regular, draft, money market and health savings) declined this quarter, the first time since 2007 when the effective federal funds rate was at 5.25%.

In comments by email to UC times, Higgins wondered if these deposits were flowing to higher-yielding banks, neobanks, brokerage houses, or certificates. He also wondered if inflation is eating into members’ personal reserves.

“Net interest margin improved very well this quarter, but was primarily driven by a higher loan-to-asset ratio (higher percentage of assets earning return on loan rather than return on excess funds) and a significant increase in return on funds surpluses,” Higgins said.

“Yield on loans improved 18 bps this quarter, very good, but cost of funds increased 15 bps, so it’s almost a dead game there. I hope to see loan yields move faster,” he said. “Sufficient return is required today to cover the increased cost of funds in future periods.”

Higgins said most of the loan growth has been with car loans and first mortgages, which tend to be fixed-rate.

The “effective federal funds rate” has risen 380bp in just nine months. In the last two rate hike cycles, it took 2.0 and 2.5 years, respectively, to see that much movement,” he said.

mike higgins mike higgins

While savers tend to be slow to initially react to rate increases, they tend to respond faster in later stages.” when rates move enough, people start paying more attention to what they’re earning,” Higgins said.

“Could we have jumped the early rate cycle inelasticity and re-priced the late cycle to retain deposits?” she asked.

“A 380 bp increase in nine months should catch the attention of many consumers and businesses,” he said. “If credit unions are booking fixed-rate loans today and the yield has only moved 18bp, is that enough to cover rapid increases in the cost of funds in future periods?”