The following 42-page 3Q 2022 Credit Union Financial Performance Indicators report — released by Filene Research Institute this past week — looks at six aspects of U.S. credit union performance over the prior 10 years for perspective, as well as the prior four quarters for sensitivity to emerging trends.
As of third-quarter 2022:
- Operating return on assets (ROA) jumped15 percentage points to 1 percent, which is significantly above the 10-year average of 0.79 percent. That’s great news for financial sustainability, but other mixed factors are part of this picture (see below).
- It was another quarter of explosive loan growth. Loans held on the industry’s balance sheet grew at an annualized rate of 22 percent. The loan-to-asset ratio jumped to 67.8 percent, which is now above the 10-year average.
- The combination of a higher loan-to-asset ratio (improved asset mix) and rising surplus funds yield helped net interest margin (NIM) improve 0.26 percent.
- Hidden in net interest margin (NIM) is the following fact: while loan yield improved 0.18 percent, cost of funds increased 0.15 percent. Just over 60 percent of loan growth this quarter was in first mortgages and auto loans, which tend to be fixed rate. The implication is that enough contractual yield today is necessary to cover increasing funding costs in the future.
- Due to interest rate hikes by the Federal Reserve, surplus-funds yield improved by 0.61 percent. Further signaled rate hikes will help extend this favorable trend.
- As predicted, further interest rate hikes caused unrealized losses on available-for-sale securities to increase (now $39.2 billion), which represents 17.2 percent of total credit union net worth. Fortunately, there is no loss if a security is held until maturity, but it strains liquidity.
- Operating non-interest income grew at an annualized rate of 6.3 percent this quarter, but now it only represents 38.5 percent of non-interest expense (which is lower than any point in the past 10 years).
- Rate-sensitive funds grew at an annualized rate of 41 percent. Heavier reliance on this funding source will drive up overall cost of funds.
- Cost of funds is starting to increase quickly, up by 0.15 percent. Deposit pricing tends to be inelastic early in an upward interest rate cycle, but the size of Federal Reserve hikes has pushed the industry into late-cycle pricing in just a matter of months. Expect intense competition for deposits.
- Non-interest expense increased at an annualized rate of 9.7 percent this quarter, higher than the 10-year average.
- Net charge-offs have remained far below the 10-year average but ticked up again.
- The industry’s relationship share/deposit balance declined -4.4 percent (annualized rate) for the first time since 2007.
- The Federal Reserve raised its benchmark short-term interest rate paid on reserve balances to 3.9 percent in November 2022. The federal funds rate is now maintained in a target range of 4.25 to 4.5 percent, and this increases borrowing costs to a new high since 2008 (it is the sixth consecutive rate hike).