Loan Interest Income Drives Credit Union Earnings Higher

An increase in income offset a decline in noninterest income, driving credit union revenue higher in the first quarter of 2014.
Janet Lee

According to Callahan & Associates preliminary FirstLook first quarter data, credit unions generated $12.3 billion in total revenue in the first three months of 2014, up 41 basis points compared to the first three months of 2013. The rise in revenue was driven by an increase in interest income, which includes both net loan and investment income, to offset a decline in noninterest income.

YEAR-OVER-YEAR GROWTH BY INCOME CATEGORIES
Data as of March 31, 2014 For All FirstLook Credit Unions
Callahan & Associates | www.creditunions.com

graph-1

Source: Callahan & Associates Peer-to-Peer Analytics

Consumer lending is driving credit union origination activity, getting 2014 off to a strong start. Consumer loan originations are up 10.5% compared to the first quarter of 2013 to top $48.1 billion in the first quarter of 2014. As demand for consumer loans surges at credit unions, net loan income is up 2.1% compared to the first quarter of 2013 to reach $8.0 billion. The first quarter of 2014 saw a three-month growth of 1.3%, marking the fastest growth in outstanding loans since 2004. Net loan income accounts for 64.2% of total income in the first quarter of 2014, up 1.3 percentage points from the first quarter of 2013.

Comprising 9.1% of total income, investment income had the highest growth for all income categories compared to the first quarter 2013 thanks to higher interest rates. Investment income rose 7.3% in the first quarter of this year, totaling $1.1 billion.

Meanwhile, both components of noninterest income are below the levels reported in the first quarter of 2013. Other operating income earned in the first three months of 2014 is down 8.4% compared to the first three months of 2013. Amidst the higher interest rate environment and the subsequent slowdown in refinancing activity, reduced income from mortgage sales to the secondary market is impacting other operating income at credit unions. In the first quarter of 2014, credit unions sold $5.7 billion in mortgage loans to the secondary market, down 68.7% over the first three months of 2013. Fee income, the other component of noninterest income, also declined 5.3% to $1.7 billion in the first quarter of 2014, compared to the same period last year. With accelerating lending activity, noninterest income makes up a smaller portion of credit unions income in the beginning of the year 26.7% as of March 2014, down two percentage points from March 2013.

As loan growth picks up in 2014, net interest margin rose in the first quarter. Net interest margin increased three basis points annually to top 2.80% in the first quarter of 2014. This is the first time since 2010 that the net interest margin has risen year-over-year.

Operating expenses are up 4.5% versus the first quarter of 2013, which is largely attributed to higher salary and benefit costs. However, the operating expense ratio is down one basis point to 3.03% as asset growth outpaces expense growth at credit unions.

NET INTEREST MARGIN VS. OPERATING EXPENSE RATIO
Data as of March 31, 2014 For All FirstLook Credit Unions
Callahan & Associates | www.creditunions.com

graph-2

Source: Callahan & Associates Peer-to-Peer Analytics

Return on assets is 0.78% through March 2014, down from 0.86% reported in the first quarter of 2013. Despite a lower ROA in the first quarter, the net worth ratio is up 28 basis points to 10.6% as of March.

May 30, 2014

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