Credit union CEOs are bracing for a tough year.
The credit union industry already saw a decline in earnings last year. The industry posted net income of about $18.5 billion through the first three quarters of 2022, down roughly 14% from the same period a year earlier, according to data from the National Credit Union Administration. That was due, in part, to non-interest expenses ticking up more than 9% and loan-loss provisions rising more than 250%, according to the NCUA's third-quarter data, which is the most recent available.
Factors, such as rising deposit costs, challenges with liquidity and lower loan volumes, are likely to continue to make 2023 difficult, experts said.
Michael Shafer, CEO of
Pathway Financial earned $4.3 million in the first nine months of 2022, an 18% decrease compared with a year earlier, according to the most recent call report data from the NCUA.
Shafer said the credit union is projecting a 10% to 12% reduction in net income in 2023 compared with last year. He said although many credit unions will be earning more interest income due to increasing rates on fixed and adjustable rate loans, it is almost certain that the volume of lending activity will drop sharply this year.
"Most credit unions rely heavily on new loan growth to sustain future profitability," Shafer said. "We are also anticipating an increase in delinquency and charge-offs over the next year in addition to rising compensation and operational costs. It is our belief that all of these factors will weigh heavily on the bottom line for credit unions."
Kendall Garrison, president and CEO of the $1.5 billion-asset Amplify Credit Union in Austin, Texas, agrees. Garrison said in an interview that credit unions will certainly see some earnings challenges, especially if a widely predicted recession comes to pass.
That could cause credit unions that are in the auto lending space to see some headwinds. Consumer struggles combined with falling prices for used cars could make for a difficult year for charge-offs in the auto finance business, he said.
Another huge challenge for credit unions is liquidity.
The Federal Reserve's
"A number of the CEOs I talk to are reporting that liquidity is their No. 1 concern," Garrison said. "Adding to that problem is lower values in investment portfolios, which can be sold to meet liquidity needs but at a significant loss as the bond market had a terrible 2022."
Mike Williams, the credit union's president and CEO, said he is budgeting a 10% year-over-year reduction in earnings driven primarily by higher-than-normal loan losses.
"They haven't come to fruition yet, but with the economy where it is at we believe loan losses will be increasing. Cost of funds is taking a big jump to keep liquidity concerns at bay as well," Williams said.
Tim Scholten, founder and president of the credit union and community bank consultancy Visible Progress, said deposit rates have been climbing at the same time deposits are tougher to come by.
Some of his clients are in a strong borrowed-funds position as overnight funds are still cheaper than certificates of deposit, he said. Rising rates are expected to put a little bit of pressure on net interest margins in 2023 for many institutions with largely fixed-rate portfolios.
"The general outlook is that 2023 will have a few more challenges than 2022 due to rising rates, rising cost of living and increased competition for fewer mortgages this year," he said.
Horizon Federal Credit Union in Williamsport, Pennsylvania, earned $479,000 in the first nine months of 2022, an 18% decrease compared with a year earlier. Justin Howard, president and CEO of the $142.5 million-asset organization, said he is expecting a 40% reduction in net income for 2023.
The main factors for the expected decline are an increase in costs for Current Expected Credit Losses, or CECL, implementation, loan volume decrease — particularly real estate — due to the anticipated recession, increase in deposit funding costs and elevated information technology expense to meet member needs and regulatory demands.
But not everyone is anticipating a gloomy 2023.
The $42 million-asset Family Focus Federal Credit Union in Omaha, Nebraska, earned $114,000 in the first nine months of 2022, a 21% increase compared with a year earlier.
President and CEO Amy Brodersen said the credit union projects a slight decline in return on assets as a result of some "aggressive strategic initiatives" it has planned.
"But we had fantastic growth in our loan portfolio, which is definitely helping improve our earnings," she said.
