CU Balance Sheet Metrics Spotlighted in Financial Report

The 42-page 4Q 2022 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 fourth-quarter 2022:

• Operating return on assets (ROA) fell by -0.05 percent to 0.95 percent, but it’s still above the 10-year average of 0.81 percent.
• There was another quarter of above-average loan growth. Loans held on the balance sheet grew at an annualized rate of 13.4 percent, and the loan-to-asset ratio increased to 69.5 percent, which is above the 10-year average.
• Due to interest rate hikes, surplus-funds yield improved by 0.49 percent. Further interest rate hikes signaled by the Federal Reserve will help extend this favorable trend.
• Cost of funds is moving quickly and up by 0.32 percent. Deposit pricing tends to be inelastic early during an interest rate cycle, but the size of Federal Reserve hikes has pushed us into late-cycle movement in just a matter of months. Expect sustained and intense competition for deposits.
• The combination of a higher loan-to-asset ratio (improved asset mix) and rising surplus funds yield helped net interest margin improve, but only by 0.08 percent.
• Hidden in the industry’s net interest margin is this fact: While loan yield improved 0.24 percent, cost of funds increased 0.08 percent faster, causing the spread between loan yield and cost of funds to shrink. Just over 53 percent of loan growth was in first mortgages and vehicles, which tend to be fixed rate. The implication: enough contractual yield today is necessary to cover increasing funding costs in the future.
• Relationship share balance declined at a -13.5 percent annualized rate.
• Rate-sensitive funds grew at an annualized rate of 53.1 percent. Heavier reliance upon this funding source will drive up overall cost of funds.
• Unrealized losses on available-for-sale securities represent 16.2 percent of total credit union net worth. There is no loss if a security is held until maturity, but it strains liquidity as witnessed by what happened at Silicon Valley Bank.
• Operating non-interest income grew at an annualized rate of 5.5 percent, but now it only represents 38 percent of non-interest expense — lower than any point in the past 10 years.
• Net charge-offs have steadily risen to 0.43 percent, approaching the 10-year average of 0.49 percent.
• Non-interest expense increased faster than net revenue (8.6 percent annualized versus 7.9 percent net revenue growth).
• Hidden in the numbers: There was a $12.8 billion net outflow of credit union deposits. Asset growth was due to non-member deposits and borrowings (rented funds).
• While inflation remains high and is above the Federal Reserve’s 2 percent annual inflation target, it has climbed to 6 percent in February, slightly down from January’s 6.4 percent increase. Nearly three-quarters of February’s price increase was driven by housing costs.
• As a response to high levels of inflation, the Federal Reserve is raising the federal funds effective rate. With a current target range of 4.50 – 4.75 percent, the federal funds rate is 4.58 percent as of March.
• In the wake of the collapse of Silicon Valley Bank and Signature Bank, analysts are speculating about a pause on short-term interest rate increases by the Federal Reserve in the coming months.

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 4Q 2022 Credit Union Financial Performance Indicators report.