Credit union margins fall in the first quarter due to significant changes in the loan portfolio

Callahan & Associates reported on Wednesday that credit unions’ net profit margins fell in the first quarter as inflation, rising interest rates and lower loan repayments changed the dynamics of their operations.

Credit unions’ net income in the first quarter was 0.86% of average assets, down from a peak of 1.04% a year earlier and 0.91% in the fourth quarter.

In the Washington, DC-based company’s first-quarter Trendwatch webinar, Chief Collaboration Officer Jay Johnson and Industry Analyst Will Hunt described the major reversals that have occurred over the past year:

  • The loan growth rate doubled, while the savings growth rate was half the rate of a year ago.
  • Loan originations for real estate remained stable, while other loans increased by 11%.
  • Net interest margins, which had shrunk in 2020, remained unchanged from a year ago.

“We’re starting 2022 very differently than we started 2021,” Johnson said.

Jay Johnson Jay Johnson

Jason Haley, chief investment officer for Dallas-based ALM First, said the current environment of rising interest rates is making deposits larger, increasing net interest margins and leading to higher unrealized losses for majors. available-for-sale bond portfolios, although these paper losses disappear. with time.

Callahan found that credit unions held $1.32 trillion in loans as of March 31, up 11.7% from a year earlier. From March 2020 to March 2021, the loan portfolio only increased by 4.3%.

Savings rose 9.3% to $1.87 trillion in the 12 months ending March 31. It was the first time that loan growth exceeded share growth since 2019. Savings had soared in 2020 at the start of the COVID-19 pandemic, and in March 2021 it was 23.1 higher. % than in March 2020.

Savings are “reaching a more normal rate of growth,” Johnson said.

Total loan origination rose 6.1% to $192.8 billion from 30.7% a year earlier to $181.7 billion.

Hunt said much of the growth came from rising prices. The total number of loans originated during the quarter decreased by 22% compared to the previous year.

“That’s a big drop from the total pipeline,” Hunt said. “A lot of people are shut out of the real estate market because of these high prices.”

William Hunt William Hunt

Despite the slowdown in the growth rate of loan origination, more originations remained on the balance sheet.

Will Hunt said the loan portfolio growth rate of 11.7% is partly the result of the economic environment and partly the result of strategic decisions. Loan production continues to be strong, Hunt said. “What changes is the mode and the type of loans.”

These changes include:

  • A change in loan types. As early mortgages have flattened, consumer lending has strengthened, Hunt said.
  • More indirect loans. Indirect lending declined in 2018 and 2019, but grew in the first quarter at the fastest annual rate since 2017. About 60% of the auto loan book in March came from indirect lending.
  • Reduced loan repayments. Members are no longer paying off their credit cards and home equity lines of credit as aggressively as they did a year ago, when their cash flow was bolstered by a series of federal stimulus payments.
  • Mortgage sales decline. Credit unions are selling fewer mortgages in the secondary market than a year ago when rates were lower. For one, the trading volume is lower, so they have less to sell. On the other hand, margins on sales are lower, limiting cash profits.

Credit unions sold about 40% of first mortgages in the secondary market in 2020 and 2021, but only sold 30% in the first quarter.

“Credit unions are giving out more of these home loans,” Hunt said.

Net interest margins were 2.57% of average assets in the first quarter, unchanged from a year ago and the fourth quarter of 2021.

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