Why many of the biggest credit unions saw earnings fall this summer

Higher deposit costs and increased provisions for loan losses contributed to a drop in earnings for many of the largest credit unions in the country in the second quarter. 

An analysis of National Credit Union Administration call report data by American Banker revealed that seven of the 11 largest credit unions in the U.S. saw a year-over-year decline in net income at the end of the quarter.

The NCUA will release its comprehensive quarterly data for the entire industry in early September.

Deposits at credit unions had risen in the first quarter amid the crisis in the banking sector, but some runoff began in late March. Comprehensive second-quarter data on deposits isn't available yet, but credit union executives say competition with banks for consumer deposits ratcheted up. Many other factors led to rising deposit costs at certain credit unions, too.

One of those was $16.9 billion-asset Randolph-Brooks Federal Credit Union in Live Oak, Texas. Its net income fell to $98.8 million in the second quarter compared with $108.2 million a year earlier, according to the call reports.

Randolph-Brooks' chief financial officer, Mark Sekula, said interest rates have steadily and significantly increased, which has added to the company's cost of deposit products. 

"But this has created a unique opportunity for our members to place money at low-risk and guaranteed return," Sekula said.

Sekula also cited increased pay, other operational costs and the regulatory environment as culprits in its decline in net income.

A $35 million reversal of loan-loss provisions also boosted the company's income in the first half of 2022, Sekula said.

Some banks also cited higher deposit costs for sluggish growth during second-quarter earnings calls. 

Mark Treichel, a former executive director of the NCUA who now runs Credit Union Exam Solutions, said earnings pressures for credit unions across the board are related to the Federal Reserve's interest rate hikes after loans and investments were booked in the last two years at lower rates.

"That was followed by the Fed run-up of rates driving the cost of funds," Treichel said.

Net income at State Employees Credit Union in Raleigh, North Carolina, fell to $244.6 million in the second quarter compared with $284 million a year earlier. 

The $49.6 billion-asset credit union — the second largest in the U.S. — said it anticipates higher deposit costs continuing to compress its net interest margin as financial institutions compete for funding.

The most significant impact regarding the decline in year-over-year net income was an increase in the provision for loan loss expense, said SECU CFO Rex Spivey.  

Loan charge-offs through the first half of 2022 were much lower than historic levels. But the combination of higher loan growth and increased charge-offs through the second quarter of 2023 have required an increased provision for loan-loss expense, Spivey said. 

Still, earnings continued to grow at some of the nation's largest credit unions. 

The $165.3 billion-asset Navy Federal Credit Union in Vienna, Virginia, reported net income of $985 million in the most recent quarter compared with $900 million in the same period last year.

Things were not as positive at Pentagon Federal Credit Union in McLean, Virginia, whose net income fell by 62% to $64.4 million in the second quarter from a year earlier. 

PenFed's President and CEO James Schenck said the $35.5 billion-asset company's results included an additional $87.7 million in loan-loss reserves, which reflect higher anticipated lifetime credit losses. PenFed adopted the Financial Accounting Standards Board's new accounting standard — current expected credit loss, or CECL — in 2023. 

"Despite the current market environment and continuing decline in loan demand as the Federal Reserve raises interest rates, PenFed's balance sheet and capital position remain strong," Schenck said.

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CECL was also partly responsible for the net income drop for SchoolsFirst Federal Credit Union in Tustin, California.

The $28.7 billion-asset company's second-quarter earnings fell 17% from a year earlier to $80 million.

SchoolsFirst's CFO, Michael Faulwell, said the company remains in a strong financial position, with record membership growth this year and a capital ratio of more than 10%.

Sekula from Randolph-Brooks said the credit union's strategic planning has considered the possibility that rates and operational costs may continue to increase and thus further affect the balance sheet. 

"We are hopeful rates will stabilize by the end of 2023 and into 2024," he said. "Even as we make adjustments for well-noted changes in the economy, RBFCU is on track to exceed pre-COVID performance."