Credit Unions Enter 2013 With Unprecedented Momentum

As consumers examine their financial services options, the credit union approach of putting members’ needs first is opening new opportunities for the industry.

 
 

Credit unions are heading into 2013 with unprecedented momentum. They are on pace to shatter records for new membership growth, lending activity, new checking accounts, and earnings through the third quarter of 2012. As consumers examine their financial services options and assert their power of choice, the credit union approach of putting members’ needs first is opening new opportunities for the industry.

The industry’s momentum is building on the results credit unions have posted since the start of the Great Recession. Since 2007, credit unions have originated more than $1.2 billion in loans, including more than $700 billion in consumer loans, $420 billion in first mortgages, and $55 billion in member business loans to more than 55,000 businesses. This activity occurred during a period when lending activity at many financial institutions plummeted. Although the economic downturn affected credit unions, particularly those in the hardest hit states, the industry’s focus remained on doing what was right for members. That consistent focus is now paying dividends.

The Seattle Times covered a report from Scarborough Research that affirmed the consumer shift from banks to credit unions. According to the report, 28% of households in Seattle now use a credit union as their primary financial institution, up from 21.5% in 2008 and ahead of Bank of America and Chase. That 30% jump in credit union market share in just a few years is amazing, but it only ranks as the ninth-largest increase out of the 96 U.S. metro areas the research covered.

Credit unions have added more than 800 net new branches and 11,000 employees since the downturn began. These investments underscore the important economic role credit unions play in their communities as well as the cycle of success that occurs as cooperatives gain momentum. As more members contribute to the credit union’s success with their savings, borrowings, and transactions, the credit union is able to lend more, invest in new capabilities, and expand its service base.

12-MONTH CHANGE IN NET NEW MEMBERSHIP
DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

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Generated by Callahan & Associates' Peer-to-Peer Software.

Credit unions have added 2.5 million new members over the past year. Now they need to serve this new generation of members with the same attention they’ve shown members throughout their history. Such attention is driving the industry’s results in 2012 and positioning it for a breakout year in 2013. Credit unions will evolve to meet members’ changing needs, but the foundation of their success remains constant: Members come first.

30% Jump In Loan Volume Sets Record Pace

  • Credit unions posted $89.3 billion in originations in third quarter 2012.
  • First mortgage originations are up 64% compared to the first three quarters of 2011.

Credit unions posted their highest ever third quarter lending activity in 2012 with $89.3 billion in originations. This is a $22 billion, or 33%, increase from the third quarter of 2011 and follows record originations posted in the second quarter this year. Through the first nine months of 2012, credit unions have originated $244.5 billion in loans. That’s 30% more than in 2011 and a 16% improvement over the previous high recorded in 2009.

CREDIT UNION YTD 1ST MORTGAGE ORIGINATION MARKET SHARE BY STATE
DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

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Click Here For Larger Image (pdf)
Source: Data provided by First American CoreLogic, the nation's largest data aggregator touching 97% of all US mortage transactions

Credit unions are posting increases in lending across the portfolio. Consumer loan originations are up $18 billion, or 16%, compared to the first three quarters of 2011. Originations of first mortgages are up 64% — $35 billion — over the same period.  Member business lending activity is up 31%; other real estate lending, primarily home equity loans, is up 3%.

Credit unions are helping members save thousands of dollars in interest expense by refinancing loans at lower rates. But it is not solely the great value credit unions provide that is generating record loan volume, it is also the way credit unions develop products that respond to member needs. Northwest Federal Credit Union ($2.4B, Herndon, VA) provides financing to members who want to pursue a professional certification or career-based coursework —  a critical need in an economy in which the unemployment rate remains elevated. Latino Community ($113M, Durham, NC) launched the Dreamer Loan, which advances the $465 application fee for members applying for Deferred Action under the Dream Act. The loan term is six months and requires no credit history. Although the loan amount is small, it provides a huge opportunity, and the credit union received more than 130 applications in the program’s first week.

2012 YTD CREDIT UNION AUTO LOAN ORIGINATION MARKET SHARE BY STATE
DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

2012-ytd-cu-auto-loan-origination-market-share-by-state

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Source: Autocount data from Experian Automotive

Credit unions’ lending success is resulting in higher national market share. Year-to-date auto lending market share was 15.2% through September, up from 14.5% in September 2011. The bump was largely led by a two-percentage-point rise in the industry’s new car loan market share, which increased to 11.8%.

First mortgage lending market share was 7.2% through September, up from 6.0% a year ago and more than triple the 2.0% share recorded in September 2007. Perhaps more significant than the national average is the number of geographic areas in which credit unions have become leading mortgage lenders. In 25 metropolitan statistical areas across the country, credit unions captured at least 20% of the mortgage lending activity. As home prices and sales gain traction nationally, credit unions have the opportunity to capture greater share of the mortgage business. Home affordability remains high, particularly with historically low interest rates. The environment provides an opening to develop first-time homebuyer programs and cultivate stronger relationships with local realtors who are looking for dependable sources of financing for their clients.

More Than $24 Billion Added To Loan Balances

  • The credit union loan portfolio grew 4.2%.
  • The auto loan portfolio topped $177 billion.

Record origination activity translated to a net increase of $24.1 billion in loans outstanding on the balance sheet. In parallel with origination activity, the 4.2% growth rate in the $598.6 billion portfolio occurred across the loan portfolio. With the exception of other real estate loans, every loan category posted a faster growth rate in 2012 than one year ago.

The auto loan portfolio posted the largest dollar increase, up $11.8 billion over the past 12 months to reach $177.7 billion. Used auto loan balances increased 7.9% since September 2011 while new auto loans outstanding rose 5.8%. New auto lending activity picked up dramatically amid a 19.5% increase in new car sales in 2012. By comparison, new auto loan balances posted a year-over-year decline of 10.7% in September 2011.

YTD LOAN ORIGINATIONS
DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

ytd-loan-originations

Loan originations in 2012 are on pace to shater 2009's record activity.
Generated by Callahan & Associates' Peer-to-Peer Software.

Real estate loan balances increased 2.4% since September 2011. The 6.2% rise in first mortgage loans was more than enough to offset an 8.2% decline in other real estate loans. Home equity loans comprise the bulk of other real estate loans, and members are consolidating those into first mortgages when they refinance.

Credit union activity in the secondary market continues. Credit unions sold $47 billion, or 53%, of first mortgage originations through the first nine months of the year. Fixed rate first mortgages now account for 14.8% of the industry’s balance sheet, a lower percentage than in 2008 and 2009.

Credit card loan balances were up 5.5% over the past year. Member business loans, the fastest-growing loan category, grew 8.5%.

Just as loan growth is occurring across the portfolio, it is also occurring across the country. Over the past year, 48 states have posted positive loan growth including four — North Dakota, Oklahoma, Idaho, and Iowa — with double-digit growth. By contrast, only 31 states in 2010 posted positive loan growth.

The quality of the loan portfolio is improving with the economy. Delinquency was 1.18% as of September; that’s down 42 basis points from one year ago. The net charge-off rate was 74 basis points, which is an 18-basis-point drop from September 2011.

Membership Growth Drives Share Increase

  • Credit union member growth was nearly four times what it was in 2011.
  • New shares have increased by more than $51 billion.

The 2.7% membership growth rate over the past year is nearly four times the rate posted in September 2011. Credit union membership is on the rise, and the industry added 2.5 million new members over the past 12 months. This is a fourfold increase over the 593,000 members added in the prior 12 months.

New members are fueling a surge in share balances. Members have deposited more than $51 billion in new shares since September 2011, almost all of it into core savings and checking accounts. Both regular shares and share drafts posted double-digit growth rates, and balances rose $29.2 billion and $10.4 billion, respectively. Money market share balances were up 7.9%. Regular shares, share draft, and money market balances accounted for 68% of total deposits as of September. This provides credit unions with a strong, stable, low-cost base for funding loans. IRA/Keogh balances rose 2.6% over the past year while certificate balances declined 2.5% as members opted to stay liquid.

YTD LOAN ORIGINATIONS BY TYPE
DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

ytd-loan-originations-by-type

Consumer and first mortgage loan volumes are at all-time highs.
Generated by Callahan & Associates' Peer-to-Peer Software.

Checking account growth is a significant factor in the overall share growth. New members are bringing over multiple savings accounts when they open a share draft account, which indicates the member is making the credit union their primary financial institution. Members have opened nearly 3.4 million new checking accounts over the past year. Members are opening checking accounts at a rate more than double what they did in the year prior; it’s a rate previously unseen in credit unions. As of September, 51% of members had a checking account with their credit union. That’s almost two percentage points higher than one year ago.

That checking penetration is increasing at a time of record new member growth underscores the momentum in member relationships. The average member relationship, including both savings and loan balances, was $15,184 as of September, up 2.6% over the past 12 months. Average relationships are growing across credit unions of all sizes. In fact, the average member relationship is growing faster at credit unions with assets less than $100 million than it is for larger credit unions.

12-MONTH LOAN GROWTH BY TYPE
DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

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Growth has accelerated across the loan portfolio from September 2011.
Generated by Callahan & Associates' Peer-to-Peer Software.

As a result of the share growth, credit unions now hold 9.0% of deposits nationally. In four states — Alaska, New Mexico, Washington, and Hawaii — credit unions hold more than 20% of the local deposit base.

Investment Balances Rise

  • Agency securities accounted for half of the total investment portfolio.
  • Corporate credit union investments fell 33% over the past year.

With share balances rising at a faster rate than outstanding loans, the credit union investment portfolio is growing. Total investments hit $383.6 billion as of September, up 9.1% over the past year.

Agency securities are the dominant investment choice for credit unions today and accounted for 50% of the total portfolio. At $48 billion, investments in banks and savings and loans associations were the second-largest component of the investment portfolio. Such investments, which were primarily jumbo certificates, were up 9.1% over the past 12 months. Corporate credit union investments fell 33% over the past year to $31 billion and now account for 8% of total investments.

12-MONTH LOAN GROWTH IN CHECKING ACCOUNTS
DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

12-month-growth-in-checking-accounts

The influx of new members over the past 12 months has resulted in strong checking account growth.
Generated by Callahan & Associates' Peer-to-Peer Software.

Credit unions are extending the maturity of their investment portfolios as they look for higher returns given the Federal Reserve’s expectations of no additional rate increases until at least 2015. Investments maturing in more than one year represent 55.4% of total investments, up from 53.0% in September 2011. Even with this increase, credit unions remained highly liquid with more than 25% of their portfolio held in cash and equivalent short-term investments.

Mortgage Activity Pushes Up Non-Interest Income

  • The average loan yield dropped 36 basis points over the past year to 5.47%.
  • Non-interest income increased 14.9% versus one year ago.

Total revenue was flat through the first nine months of the year versus 2011. Interest income was 4.6% lower as the balance sheet re-priced and members financed loans at lower rates. Loan interest income was down 3.5% while interest income from investments declined 11.7%. These declines are occurring despite growth in both categories on the balance sheet and will likely continue if rates do not increase.

The interest rate environment makes lending the No. 1 priority for credit unions. The average loan yield was 5.47% as of September. That is a 36-basis-point decline over the past year, but loan yields are still more than four times the investment yield of 1.32%.

AVERAGE MEMBER RELATIONSHIP
DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

average-member-relationship

Credit unions continue to increase their relationship with members, even given such strong member growth.
Generated by Callahan & Associates' Peer-to-Peer Software.

The cost of funds has fallen 20 basis points from one year ago to 0.74%. With interest income falling at a steeper rate, the net interest margin has tightened to 2.96%, a 21-basis-point decline over the past 12 months.

Offsetting the decline in interest income is a 14.9% rise in non-interest income. Fee income increased 5.4% versus a year ago while other operating income surged 28%. Record mortgage lending was a primary driver of the increase in other operating income as credit unions sold more than half of their mortgage volume to the secondary market and generated gains on the sales.

Lower Provision Expense Helps Earnings Rise

  • Credit unions employed more than 245,000 FTEs.
  • Credit unions reserved $1.19 for every $1.00 of delinquent loans.

Operating expenses were up 7.0% compared to the first three quarters of 2011. The bulk of the increase is tied to higher salaries and benefits. The employee base has risen 3.0% nationally to more than 245,000 full time equivalent staff. The ratio of operating expenses to average assets was up two basis points to 3.07% as of September.

Helping to offset the operating expense increase is a 25.5% decline in the provision for loan loss expense. As asset quality improves, credit unions can reduce the amount they set aside for losses. Even with the reduction, credit unions are well reserved for loan losses as the allowance for loan loss currently covers $1.19 for every $1.00 of delinquent loans.

NCUA’s corporate credit union stabilization assessment reduced the industry’s return on assets by 10 basis points, but the 85-basis-point ROA is still 19 basis points higher than September 2011 and is the highest since 2006. Every state is posting a positive ROA in 2012, with the sand states of Utah, Arizona, and Nevada posting the biggest jump in ROA over the past year. Each has increased more than 45 basis points.

The solid bottom line is pushing capital levels higher. Total capital is up 6.6% over the past year, reaching $114.8 billion. The net worth ratio was 10.3%, while total capital, including the allowance for loan losses, was 11.2%.

Building Long-term Success

Credit union performance in 2012 is outstanding and is improving in every measure. Cooperatives are attracting a new generation of members that see their credit union as a place worthy of their business. Credit unions, in turn, are recognizing the importance of the member relationship.

As the industry approaches the end of the year, many credit unions are announcing plans to return record bonus dividends to their members. DFCU Financial ($3.3B, Dearborn, MI) announced a $21 million dividend, marking the seventh consecutive year the credit union has paid a dividend. Since 2006, DFCU Financial has paid out $130 million in a program that rewards both loan and savings balances. This year’s record $21 million represents half the credit union’s earnings, and the credit union’s dividend program has provided a needed stimulus to a struggling Michigan economy.

DFCU Financial isn’t the only credit union giving back to its members. Municipal Employees Credit Union ($1.2B, Baltimore, MD) announced three bonus dividends in 2012 totaling $4.25 million. These programs provide positive publicity; more importantly, they reflect how credit unions do business. A bonus dividend is one way to convey credit union value and show members firsthand the benefits of a cooperative structure.

Credit unions should reward participation; after all, the cooperative financial services industry succeeds only with a dedicated, active membership. Members, likewise, benefit from the long-term view of boards and managers. Credit union performance is not about quarterly earnings but rather about building a sustainable organization that delivers greater member value over time.

CAPITAL PER MEMBER
DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates | www.creditunions.com

capital-per-member

Credit per member grows in conjunction with credit unions.
Generated by Callahan & Associates' Peer-to-Peer Software.

The average amount of capital per member in credit unions today is $1,207. Capital per member rises on average as credit unions grow, underscoring the virtuous cycle created as credit unions and members achieve greater success. It is long-term relationships that lead to such success.

As credit unions head into 2013, they must continue to build for long-term success. Their momentum gives them the opportunity to invest in their business and their members. They must continue to invest in the products and services that matter to members and ensure they are where their members need them to be. At a time when government is pulling back, credit unions’ self-help model can play a critical role. It can, in fact, be a leader in 2013 and beyond.