According to three of the 10 largest credit unions, a combination of a market slump in asset values and lower revenues on sales of first mortgages caused the massive drop in operating profit excluding first trimester fee.
Annualized returns on average assets were 0.95% for the Top 10, but the result was down from ROA of 1.43% in Q1 2021. In fact, ROA is down for the group every quarter since hitting 1.66% in the second quarter of last year.
Consider three major groups of operating income:
- Commission income performed well. It fell from 30 basis points in the first quarter of 2021 to 34 basis points in the first quarter of this year.
- The largest contributor to the overall 48 basis point year-over-year decline was a 39 basis point drop in what the NCUA calls “Other Income” in the operating income basket, or “IS0020” account. . It contributed 45 basis points in the first quarter of this year, compared to 85 basis points a year earlier.
- This was followed by a number of other distinct subsets of operating profit, which combined were worth 3 basis points to first-quarter ROA, compared to 10 basis points a year earlier.
Operating profit excluding expenses is the sum of these last two sets and lowered the ROA of the Top 10 by 46 basis points.
Non-fee revenue fell 53% to $254.9 million for the three credit unions that responded by email to CU time questions: Navy Federal Credit Union, Vienna, Va., the nation’s largest credit union with $160.4 billion in assets and 11.4 million members as of March 31, PenFed Credit Union, Tysons, Va. (35, $4 billion, 2.7 million members) and BECU, Tutwila, Washington ($30.4 billion, 1.4 million members).
Credit union officials said much of the decline came from unrealized losses, as it reduced the value of loans and investment stocks to reflect general losses.
Navy Federal’s no-cost operating profit fell from $380.7 million in the first quarter of 2021 to $189.5 million in the first quarter of this year.
John Collins, chief financial officer of Navy Federal, said no-cost operating profit was reduced by market declines and lower spreads on mortgage sales.
“Like many others in the industry, global changes in the marketplace and economy have impacted Navy Federal,” Collins said. “The stock markets have lost value compared to the previous year. In addition, spreads on the mortgages we sold have tightened. »
The biggest decline in net profit occurred at BECU, where first-quarter ROA was just 0.01%, down from 1.18% a year earlier. Its non-fee revenue fell 79% to $14 million from $68.2 million a year earlier.
Robert Gatlin, vice president of financial planning and analysis at BECU, said the declining assets included trust mutual funds to pay for employee benefits as well as investments in mutual funds to finance charitable contributions, as permitted by state and federal regulations.
“During the first quarter, the market for these investments fell significantly, as did all equity and bond markets due to inflation fears and the crisis in Ukraine,” Gatlin said. “We view them as long-term investments and recognize that short-term events will create volatility, but over the long term, these investments will allow us to improve our support for our communities and our employees.”
BECU’s “Other” operating income category fell from $47.2 million in the first quarter of 2021 to $24.4 million in the first quarter of this year. Gatlin said the main culprit was the decline in the value of fixed-rate mortgages held at fair value as interest rates rose.
BECU uses derivatives (interest rate swaps) to reduce its sensitivity to changes in interest rates. But despite a $16 million gain from those swaps, its first-quarter loss among the basket of various operating revenue streams was $10.4 million, compared with a $21 million gain a year earlier. early.
PenFed’s no-cost operating profit fell from $97.8 million in the first quarter of 2021 to $51.4 million in the first quarter of this year. “Other” operating income fell from $105.2 million in the first quarter of 2021 to $34.9 million in the first quarter of this year.
PenFed said the decline in “other” operating income represents its strategic decision to sell fewer mortgages than in the first quarter of 2021 “due to extreme market volatility.”
“Due to the market disruption, we also saw a change in fair value which we believe is a result of market dislocation and loan fundamentals are strong,” PenFed said.
PenFed also noted that its net interest income rose 75% to $304.3 million. The net interest margin fell from 2.58% of average assets in the first quarter of 2021 to 3.10% in the first quarter of this year.
For the Top 10 as a whole, net interest margins increased by 7 basis points to 2.94%.
Loan production also fell sharply compared to the first quarter of 2021 – excluding PenFed.
PenFed has increased its loan production over the past two years with a strategy of selling a lot of them. It issued $11.6 billion in loans in the first quarter, slowing to a mere 125% increase from a year earlier.
The other nine Top 10 credit unions issued $30.1 billion in loans in the first quarter, down 9.5% from $33.3 billion a year earlier.