Some good news for UCs as Q1 profits set record despite weak loan growth
Credit unions in the first quarter reaped their biggest returns on assets in more than 18 years, Callahan & Associates said Wednesday.
Net income for the three months ending March 31 was 1.03% annualized of average assets – the highest since the fourth quarter of 2002 and the first time it has exceeded 1% since 2003, according to the Washington DC-based credit union company’s Trendwatch quarterly report
The ROA fell to 0.53% in the second quarter of 2020, with COVID-19 being declared a pandemic on March 11. It rose steadily to 0.83% in the fourth quarter.
Despite Wednesday’s Ministry of Labor report that the 12-month inflation rate was 4.2% in April, overall economic growth was 6.5% for the first quarter and rising interest rates in the long run will benefit the interest margins of credit unions.
“The economy looks like it’s going to be positive for the rest of the year,” Jay Johnson, Callahan’s director of collaboration, said during the webinar presentation.
Callahan found that the biggest gain for ROA came from a sharp drop in loan loss provisions. They were only around $ 700 million in the quarter, the lowest level in at least five years. They climbed to $ 2.1 billion in the first quarter of last year and peaked at $ 2.7 billion in the second before falling back to $ 1.8 billion in the fourth quarter.
At the start of the pandemic, many members of the movement expected the quality of assets to decline. But strong fiscal and monetary support has allowed families to maintain their payments, so delinquency and deduction rates have actually fallen from pre-pandemic levels.
Net interest margins fell from 3.16% of average assets in the first quarter of 2020 to 2.75% in the first quarter of this year, but the decline in operating expenses was also strong. The expense ratio was 2.56%, down from 2.95% a year earlier.
While these factors roughly canceled out, total operating profit increased by nearly $ 1 billion. Fee income declined 2.4% to $ 2.1 billion, while other operating income increased 34.6% to $ 4 billion.
The first mortgage initiations were a major factor. They stood at $ 75 billion for the quarter, up 49% from the first quarter of 2020 and just below the record volumes of the last three quarters of 2020. Credit unions sold about 30% of these mortgage loans, the product falling under the category of “other operating income”.
It might not last. For the full year, the Mortgage Bankers Association expects first mortgage initiations for all lenders to drop 14.2%, refinances to drop 32% and purchases to increase 16%.
In addition to first-time mortgages, other credit union loan receivables rose 21% to $ 107 billion – their highest level since at least the fourth quarter of 2019.
But Alix Patterson, director of the Callahan experience, said origination growth has faded in the portfolio due to loan sales and a continued increase in member savings, including a large some were used to pay off credit cards and, to a lesser extent, auto loans.
“We’re kind of spinning our wheels,” she said. “Credit union members are paying off their debts almost as fast as credit unions can create.”
Credit unions held $ 1.18 trillion in loans as of March 31, up just 4.4 percent from a year earlier, while savings stood at $ 1.71 trillion, a gain of 23.2% which is the largest ever recorded.
Credit unions bought more than usual in loan interests to help offset the low returns they would otherwise earn on short-term investments. And the rise in long-term rates has boosted the interest margins of the loan portfolio.