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Credit Union Report: 1Q 2023 Balance Sheet Metrics Spotlighted

The 42-page 1Q 2023 Credit Union Financial Performance Indicators report — released by Filene Research Institute this past week — analyzes multiple aspects of U.S. credit union performance in the prior four quarters for sensitivity to emerging trends, as well as the past 10 years.

As of first-quarter 2023:

  • Operating ROA fell 0.16 percent to 0.79 percent, but it remains near the 10-year average of 0.81 percent. That’s fine for this quarter, but read on as storm clouds are building.
  • Net revenue in hard dollars declined at an annualized rate of 4.6 percent. In a fixed-cost industry, the first sign of trouble shows up here.
  • Net interest income, which excludes loan loss provision, also declined in hard dollars this quarter. Net interest margin fell 0.06 percent to 3.01 percent.
  • Cost of funds continues its upward trend, up 0.28 percent this quarter. Expect intense competition for deposits.
  • Operating non-interest income in hard dollars declined at an annualized rate of 13.2 percent. It is 35.8 percent of non-interest expense; lower than any point in the past 10 years.
  • Without non-interest income, credit unions would be unprofitable. This income source represents 1.04 percent of assets, greater than the 0.79 percent operating ROA this quarter.
  • This was a quarter of below average loan growth. Loans held on the balance sheet grew at an annualized rate of 6.3 percent but the loan to asset ratio held steady at 69 percent.
  • Relationship share balance declined at a 7.8 percent annualized rate this quarter. This low-cost funding source has declined $93 billion systemwide versus one year ago.
  • Rate sensitive funds grew at an annualized rate of 57.9 percent this quarter. Heavier reliance upon this funding source is driving up overall cost of funds.
  • Net charge-offs have steadily risen to 0.52 percent this quarter, slightly higher than the 10-year average of 0.49 percent.
  • Switching to good news, surplus funds yield improved 0.22 percent this quarter. Signaled aversion to rate cuts by the Federal Reserve will help to extend this favorable trend.
  • Loan yield improved 0.24 percent this quarter, but cost of funds increased 0.11 percent faster, causing the spread between loan yield and cost of funds to shrink. About 68 percent of credit union loans held on the balance sheet (first mortgages and vehicle loans) tend to be fixed rate. Enough contractual yield today is necessary to cover increasing costs in the future.
  • Unrealized losses on available for sale securities declined this quarter but represent 14 percent of total credit union net worth. There is no loss if a security is held until maturity, but it strains liquidity due to reluctance/inability to take losses.
  • Non-interest expense growth slowed dramatically to 0.6 percent.
  • The industry remains well capitalized with a PCA Coverage Ratio equal to 10.6 years of historic loan losses.
  • Inflation has declined to 4 percent as of May. This is the lowest it’s been since May 2021, driven by lower energy prices.
  • However, as a response to previous high levels of inflation, the Federal Reserve has been raising the federal funds effective rate. While the previous target range was 4.50 – 4.75 percent, the target range was raised to 5 – 5.25 percent in May. As of June, the federal funds rate is 5.07 percent.

You can view the analysis of operating ROA, net revenue growth, economy-of-scale ratio, relationship-per-member metrics, product mix, and excess reserves in the 1Q 2022 Credit Union Financial Performance Indicators report.

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