Two of the nation’s largest credit unions followed the trend of others with falling earnings in the second quarter, but outpaced the lending package.
And, like others, their earnings were heavily impacted by the drop in investments earlier this year, which led them to make heavy “mark-to-market” deductions from commission-free operating income.
One was the Randolph-Brooks Federal Credit Union of San Antonio ($ 15.5 billion in assets, 1.1 million members), which was the nation’s 11th largest credit union in the second quarter, down from No. 9 in the first quarter.
The other was the BECU of Tukwila, Washington ($ 29.5 billion, 1.4 million members), which is the fourth largest credit union in the nation.
Data from the NCUA Call Report showed that the Seattle Area Credit Union posted a net loss of $ 7.2 million in the three months ended June 30, or an annualized -0.10% of its medium activities. This compared to a net gain of $ 65.9 million, or 0.92% ROA, in the second quarter of 2021 and 0.01% ROA in the first quarter.
The 102 basis point drop in ROA from Q2 2021 to Q2 2022 can be summed up in five broad categories, with trends mostly similar to other credit unions in the Top 10 by asset:
- -33 basis points for loan loss provisions, which went from a recovery that increased income by $ 10.5 million in Q2 2021 to more normal spending of $ 13.7 million in Q2 2021 ‘year.
- -27 bps for higher operating expenses. Others in the Top 10 kept their operating expenses on par with average asset growth, meaning their spending gains had little effect on ROA.
- +37 bps as net interest margins increased from 1.98% in the second quarter of 2021 to 2.35% in the second quarter of this year. This is the largest single income category for credit unions, and the margin squeeze due to low interest rates had kept this ratio low for the past two years.
- +2 bps for higher fees. This has been a bigger positive factor for many other top 10 credit unions.
- -81 bps for commission-free operating income. This is where mark-to-market write-downs stop and have substantially reduced ROA in both the first and second quarters for many credit unions.
Robert Gatlin, vice president of financial planning and analysis at BECU, said the decline in no-fee operating income reflects the decline in values in the equity and bond markets since the beginning of this year.
“As equity markets rebound from market lows, we would expect unrealized losses to be minimal if they don’t improve,” Gatlin said.
BECU, like many large credit unions, has fared far better when it comes to lending.
Although BECU’s first mortgage grant fell 38% to $ 562.5 million, its other residential loans nearly tripled to $ 282.1 million. Add to that commercial real estate loan that rises nearly fourfold to $ 468 million and non-real estate (mainly auto and other consumer loans) that rises 18% to $ 1.9 billion.
As a result, total origins were $ 3.3 billion for the second quarter, up 23% from the prior year and up from $ 2.8 billion in the first quarter.
“As expected with rising interest rates, mortgage volumes decreased significantly from the previous year and decreased quarter-over-quarter, but are slightly above our expectations,” Gatlin said. “In addition to offsetting the decline in mortgage volume, the volume of consumer loans, which includes automotive origins, has grown strong year over year and since the previous quarter, and has also exceeded our expectations.”
In the heart of Texas, RBFCU had similar overall trends, but better ROA.
Data from the NCUA Call Report showed that RBFCU’s net profit was $ 29.5 million for the second quarter, down 46% from the second quarter of 2021.
EVP / Chief Lending Officer Robert Zearfoss said the 46% drop in RBFCU’s net profit resulted from a $ 39 million drop in the value of trading stocks and securities from Q2 2021 to Q2 2022 , reflecting the market’s decline in bullish territory earlier this year.
“When market rates start to change – and it’s not just a change in market rates, but the aggressiveness of the change – it has a significant impact on the unrealized gain or loss on our investment portfolio,” he said.
“If we look at the ‘organic net profit’, we have seen a 73% increase over the same period,” he said.
ROA was 0.76% for the second quarter, down from 1.61% the previous year and 2.09% in the first quarter.
ROA for the first half was 1.43%, compared to 1.83% the previous year. But without the one-off, non-monetary losses, Zearfoss said his ROA would have been 2.10% in the first half of this year.
Likewise, while total non-interest income in the second quarter fell 53% to $ 33.6 million, it said the cash component was up 30% from a year ago.
“Along with our Courtesy Pay checking account and NSF revenue, a big reason for the increase is debt swapping,” said Zearfoss. “Members have spent money this year.”
Like BECU, RBFCU’s origins also looked better than earnings. Total originations were $ 1.8 billion in the second quarter, up 9.1% from a year ago. First-half originations increased 24% to $ 3.5 billion.
“Automotive origins have increased tremendously since last year,” said Zearfoss. “In 2021, we averaged around $ 150 million per month in originations. In 2022, we have an average of just over $ 200 million a month. We have recently seen a slight decline in originations as rates rise. “
Residential lending was $ 515 million in the second quarter, up 1.2% from the prior year. Residential lending in the first half increased 11.2% to $ 934.6 million.
“Refinancing has practically disappeared, but that volume has been replaced with equity transactions,” he said. “We are seeing a record number of home equity applications received during most of 2022.”