7 takeaways from NCUA's 3Q data

December 8, 2020 5:00 AM

The National Credit Union Administration's latest quarterly report on the industry's financial performance contained some positive news for credit unions.

Credit quality remains strong despite an elevated unemployment rate tied to the coronavirus, according to NCUA's data. Earnings also improved from the second quarter.

However, there were also signs that at least some credit unions could face challenges ahead. For instance, only the largest group of credit unions by asset size reported adding to their loan balances while every other asset category posted a decline, a continuation of a trend seen in the second quarter.

Much of the reported asset growth came from credit unions adding to their investment portfolios rather than making more loans. And the industry could be dealing with excess liquidity for the foreseeable future as deposits continue to pour in.

Read on for more highlights from NCUA third-quarter data. A look at second-quarter data can be found here.

Net income tumbles

Third-quarter net income for the credit union industry tumbled about 25%, to $11 billion, from a year earlier. But earnings were up about 17% from the second quarter.

This year-over-year decline was primarily attributed to a surge in institutions setting aside more for potential loan losses, NCUA said.

Interest income ticked down 0.5%, to $60.5 billion as earnings from investments fell more than 24%, to $6.3 billion.

However, noninterest income totaled $23 billion, up about 9% year over year, despite fee income tumbling almost 12%, to $7.9 billion.

The net interest margin also took a hit. It fell to 2.87%, down from 3.19% in the third quarter of 2019.

Substantial drop for ROA

Return on average assets dropped significantly in the third quarter from a year earlier. It was 66 basis points, down from 98 basis points for the same period in 2019, according to NCUA data. However, that was up slightly from the first and second quarters of 2020.

The median return on average assets also declined dramatically, falling 23 basis points, to 0.42%.

The smallest credit unions reported the lowest ROA. For institutions with less than $10 million of assets, this metric was just 0.13%, down from 0.38% for the third quarter of 2019. However, for credit unions with at least $1 billion of assets, ROA was 0.72%, a drop from 1.08% in the previous third quarter.

Assets surge

Assets at federally insured credit unions jumped more than 16%, to almost $1.8 trillion, in the third quarter from a year earlier, according to NCUA data.

This growth stemmed largely from total investments surging 29%, to $336.6 billion. Investments with maturities greater than 10 years had the biggest percentage jump, increasing by about 116%, to $11.8 billion.

Total loans outstanding increased by more than 6%, to $1.2 trillion.

Deposit flood not letting up

Credit unions continued to deal with a flood of deposits from members. Overall, financial institutions have seen a significant jump in deposits this year as consumers have looked for a safe place to put their money while weathering the economic turmoil tied to the coronavirus pandemic.

Shares and deposits surged by almost 18%, to $1.5 trillion, in the third quarter. That’s more than double the rate that deposits grew from the fourth quarter of 2018 to the fourth quarter of 2019.

Regular shares rose more than 22%, to $543.8 billion, and other deposits ticked up more than 10%, to $717 billion. Growth in other deposits was led by an almost 21% jump in money market accounts.

The average deposit balance was $12,353, up more than 14% from the same period a year earlier, according to NCUA data.

The loan-to-share ratio fell more than 8 percentage points, to 75.6%.

Lending on the rebound?

NCUA reported that overall loan balances increased by 6%, to $1.2 trillion, with most categories showing some growth.

Credit card balances were one exception and posted a year-over-year decline of about 5%. Balances totaled $60.7 billion. New car lending also fell about 4%, to $141.9 billion.

Commercial loans had the largest percentage increase at 17%. These credits totaled $91.3 billion. Mortgages also continued to be a bright spot for credit union lending. These credits ticked up 9%, to $508.8 billion, in the third quarter.

Student loans totaled $6 billion, up about 9% from a year earlier, and used auto loans rose more than 4%, to $237 billion.

However, loan growth was concentrated at credit unions with at least $1 billion in assets. Institutions in this group reported that loans ticked up almost 12%. Outstanding loans fell for every other asset class, including at institutions with $500 million to $1 billion of assets. Loans declined about 2% for this group.

Credit quality could worsen

Provisions for loan losses soared more than 47%, to $9.4 billion, year over year, NCUA reported.

At the same time, the delinquency rate fell from the third quarter of 2019 and credit quality improved in most major loan categories, NCUA said. However, there are concerns that loan quality has been artificially propped up by government benefits and deferments offered by lenders. Some experts predict that these metrics could worsen in the months ahead.

The delinquency rate totaled 55 basis points, down 11 basis points from the same period last year.

Commercial loans was the only lending category that reported an increase in its delinquency rate. This metric increased 6 basis points, to 0.76%.

The net charge-off ratio totaled 0.48%, down from 0.55% a year earlier.

Expenses drop

Third-quarter interest expense totaled $12.4 billion, down about 5% from a year earlier as rates remained at historic lows.

Noninterest expenses ticked up more than 6%, to $50.7 billion, with labor costs increasing by about 8%. Rising labor expenses were responsible for more than two-thirds of the overall growth in noninterest expenses, NCUA said. Office costs rose 6%, to $12.6 billion, and loan servicing expenses totaled $3.4 billion, up about 6%.