Financial Performance Indicators Report Pegs Key CU Trends

Illustration of report analysis

As deposit growth and loan growth at U.S. credit unions started taking very different paths in the second quarter of 2022, some additional interesting findings have been released on the industry’s operating return on assets (ROA), net-revenue growth, economy-of-scale ratio, relationship per member, product mix, and excess reserves.

The 42-page 2Q 2022 Credit Union Financial Performance Indicators report, released by Filene Research Institute, looks at six aspects of U.S. credit union performance over the prior 10 years for perspective, as well as the prior 4 quarters for sensitivity to emerging trends:

  • Operating ROA improved by 0.07 percent to 0.85 percent, which is slightly above the 10-year average. That’s great news, but there is a mixed bag of results hidden in the numbers.
  • There was explosive loan growth. Loans held on the balance sheet grew at an annualized rate of 28.9 percent, and the loan-to-asset ratio jumped to 64.9 percent, which is near the 10-year average.
  • Due to interest rate hikes, the surplus funds yield improved 0.34 percent. Further rate hikes signaled by the Federal Reserve will help extend this favorable trend.
  • Cost-of-funds remains in record low territory at 0.42 percent, demonstrating the inelastic nature (and strategic value) of checking and savings accounts when interest rates start to rise. The combination of a higher loan-to-asset ratio (improved asset mix), rising surplus funds yield, and lagging cost of funds helped the industry’s net interest margin improve 0.16 percent.
  • Hidden in net interest margin is the fact that loan yield only improved 0.01 percent. Most of the loan growth was in first mortgages and vehicle lending, which tends to be fixed rate and will squeeze margins should cost of funds start to increase.
  • Relationship share balance showed almost no growth (0.6 percent annualized). Are members starting to consume personal reserves built up during the pandemic? Will credit unions have to start increasing rates to attract funding?
  • Rate sensitive funds grew at an annualized rate of 23.1 percent. What’s troubling is: almost all that growth came from borrowings and brokered deposits, not from member certificates of deposit or interest rate accounts (IRAs).
  • Unrealized losses on available for-sale securities jumped to $28 billion and now represent 12.6 percent of total credit union net worth. Further interest rate hikes will cause this number to increase. The reluctance (or inability) to take a loss effectively makes the securities fixed-rate loans. Fortunately, there is no loss if a security is held until maturity, but it signals higher interest rate risk and a strain on liquidity.
  • For the third consecutive quarter, non-interest income declined and now represents 38.9 percent of non-interest expense, which is lower than any point in the past 10 years. Net charge-offs have remained far below the 10-year average but have ticked up slightly.
  • Office occupancy expense declined -2.3 percent.
  • Non-interest expense increased due to total employee compensation and benefits, which grew at an annualized 6.1 percent.

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