Overall, economic growth has declined, but the decline has remained shallow compared to 14 years ago. Between the third quarter of 2008 and the second quarter of 2009, the U.S. experienced four consecutive quarters of negative GDP growth, with a dip of -8.5% in the fourth quarter of 2008. Comparatively, the first two quarters of GDP contraction seem more modest, at -1.6% in the first quarter of 2022 and -0.6% in the second.

The most significant economic recessions of the 2000s were credit-driven. The dot com bust of the early 2000s as well as the subprime mortgage lending crisis of 2008 were the result of speculative capital and credit flows that proved faulty. However, unlike 2000 and 2008, the current economic shrinkage is inflation-driven. Excess liquidity, not debt, would be the catalyst for any potential recession that could occur today.

Government stimulus efforts that pumped money into households and investment markets have led to a decline in the purchasing power of the U.S. dollar. At the same time, continued imbalances of supply and demand in the mortgage and auto markets are keeping prices high while recent interest rate hikes have made financing more expensive.

Unemployment, another major indicator of the economic climate, is also at a healthier place than in the most recent recession. In the fourth quarter of 2007, the national unemployment rate was 5.0% and had been at or below that rate for the previous 30 months. At the end of the recession, in the second quarter of 2009, unemployment was still at 9.5%. In contrast, the unemployment rate at the end of the second quarter of 2022 was a near record low of 3.5%. Today’s labor market is also showing record high ratios of new job openings to potential job applications, with the new jobs rate at 6.8% as of June 2022.

Then And Now

Despite the strain to the overall financial services industry, credit unions were poised for growth during the Great Recession. The industry sustained double-digit loan growth for first mortgages for five consecutive quarters from the first quarter of 2008 to the first quarter of 2009. Average annual loan growth for first mortgages throughout 2008 was 13.0%. This was the only time first mortgage growth reached close to the most recent housing boom in 2020 and 2021. Compared to 2013 and 2014, when GDP growth was consistently positive, the annual average loan growth for first mortgages was only 2.6% each year.

Similar to the economic environment at the height of the COVID pandemic, the Fed’s reactionary monetary policy — which dropped interest rates to near zero — encouraged consumers to borrow. Furthermore, credit unions provided a necessary and secure alternative for mortgage financing, and credit unions’ mortgage market share doubled from 2.4% in the second quarter of 2007 to 4.8% a year later. Credit union mortgage market share averaged 5.6% throughout 2009 and has steadily risen every year since then. Average market share was 7.4% throughout 2021 and hit 8.3% as of June 30, 2022.

On the earnings side of the credit union balance sheet, income growth contrasted loan growth. In times of economic shrinkage, the Fed’s interest rate adjustments impact revenue the most. Consequently, lower interest rates impacted earnings.

Despite high loan and asset growth from 2007 to 2009, lower interest rates resulted in negative total income growth for three out of four quarters in 2009. However, industrywide return on assets (ROA) faced a V-shaped rebound during the Great Recession. After a dip of 146 basis points between the fourth quarter of 2008 and the first quarter of 2009, ROA returned to a positive 0.29% at mid-year 2009, staying steadily positive and increasing year-over-year. Industrywide ROA in 2021 stayed consistently above 1.0% each quarter and is now leveling off, closing out the second quarter of at 0.86%.

Higher loan growth from 2007 to 2009 also kept the loan-to-share ratio sufficiently healthy, at an average of 81.8% in 2008 and 77.4% in 2009. Comparatively, the industry loans-to-shares ratio averaged 69.6% in 2021 and closed out the second quarter of 2022 at 74.7%.

On the whole, the Great Recession was an opportune time for the credit union industry to grow its loan portfolios for longer-term earnings and higher market share. Despite the short-term decline in earnings, cooperatives were not only attaining more business but also serving loan purchasers as they lost confidence in traditional private banks. Lowered interest rates in 2008 and 2021 have also allowed the industry to serve those who might not otherwise have been able to attain home financing at any other time.

The Credit Union Perspective

In times of economic shrinkage and recession fears, the credit union mission becomes integral to the financial wellbeing of existing and potential members. The objective to reach those who are most vulnerable to economic shocks has helped keep member-owners — as well as credit unions themselves — more resilient in the long term.

The industry has thrived in previous recessionary periods, increasing its market share and sustaining growth. Cooperatives have also served as a reliable alternative to traditional banks and private, non-deposit-taking lenders, particularly during periods of economic volatility.

As a sign of commitment to members, credit unions are more likely to think of the entire loan lifecycle with the goal of taking care of members, not simply making a profit off them. At the same time, creating a balance of capital, provisions, and liquidity can help determine a short-term risk appetite that allows each institution to thrive in any economic downturn.

Laila Jiwani is a former industry analyst at Callahan & Associates.

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CREDIT UNION COMPENSATION COMPARED WITH CPI GROWTH
FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.22
© Callahan & Associates | CreditUnions.com

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FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.22

Callahan & Associates | CreditUnions.com

Source: Callahan & Associates

• Credit union employment spiked during the first quarter as the industry made efforts to attract and retain talent in a competitive hiring market.
• The industry now hosts more than 331,000 full-time equivalent employees as of March 31, a 3.7% year-over-year increase. Because of the rise in hiring, annualized revenue per employee fell slightly, declining 1.1% year over year to $256,494.
• Compensation saw a similar increase (up 3.8% year over year), to reach an average of $91,302 per employee.
• Annualized loan originations per FTE rose 2.8% year over year to reach $2.3 million.
• Overall, like many other sectors, a competitive labor market is placing operational pressure on the credit union industry, and cooperatives are directing more of their operating expenses toward compensation. Competition from fintechs and other players are also making it more difficult for credit unions to attract specialized talent.

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In the mortgage portfolio, rising home prices and decreased sales to the secondary market contributed to an increase in first mortgage loan balances.

Elsewhere, previously overallocated provisions for loan losses are maintaining capitalization ratios; however, credit unions are now spending down that line item.

No.1: Credit Unions Are Attracting New Members And Deepening Relationships

More than 5.4 million Americans joined a credit union in 2021. Total membership at U.S. credit unions grew 4.3% year-over-year to 131.1 million by year-end. The average member relationship increased, too. It rose 5.6% annually to $22,534 ‘ $1,265 higher than one year ago. Share draft penetration a key metric for tracking a consumer’s primary financial institution expanded 1.0 percentage point to a record 61.2%. As of Dec. 31, the industry reported 80.2 million open draft accounts.

MEMBERSHIP AND ANNUAL GROWTH
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.21
Callahan Associates |

No.2: Consumer Loan Originations Are On Fire

Credit unions originated nearly $800 billion in new loans in 2021 this is up 17.2% from last year’s previous record and is double the industry calendar-year totals from six to seven years ago.

Although first mortgage originations grew a healthy 7.5% year-over-year, it was consumer lending that drove most origination growth in 2021. That segment expanded 21.8% year-over-year and comprised nearly half of all origination dollars for the industry. Other real estate and commercial lending also are helping to diversify the industry’s portfolio. They jumped 35.2% and 39.1%, respectively.

Despite growth in first mortgage origination dollars, the number has dropped year-over-year. It was still higher than the historical average, but the decline indicates the market might be slowing and increasing home prices are a major factor in strong dollar generation.

YTD LOAN ORIGINATIONS
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.21
Callahan Associates |

No.3: Early Loan Paydowns Are Slowing

Total loans outstanding grew 8.0% year-over year and hit a new record of $1.2 trillion. This was the fastest annual growth rate for the industry since the onset of the pandemic.

Credit unions have made loans at a record-setting pace for nearly two years but have had a difficult time keeping those loans on the balance sheet. Federal relief packages have allowed members to pay down debt nearly as fast as they took it on; however, these early paydowns have slowed, allowing for record lending to stick around at greater rates.

Mortgages, as always, were a major driver of outstanding loan growth, but auto loans and credit card balances also expanded during the year and quarter. Indirect partnerships and secondary market participations have helped facilitate this growth.

TOTAL LOANS AND ANNUAL GROWTH
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.21
Callahan Associates |

No.4: Increased Earnings Reflects Strong Performance In 2021

A record ROA throughout the year has allowed credit unions to reinvest in capitalization and communities. The industry generated such earnings through interest income via success in keeping loans on balance sheets and expense savings. Asset quality also remained stronger than the historic norm, which has allowed credit unions to reduce their provision expenses.

However, these earnings are not sustainable and should not be in a not-for-profit industry. Provision overallocation in 2020 has allowed credit unions to maintain their capitalization ratios in 2021. However, ballooned allowance accounts will eventually burn off and need to be replenished, and operational expenses will need to increase to support increased asset balances. The slight decline in fourth quarter earnings compared to earlier in the year is a sign this shift has started to occur.

RETURN ON ASSETS
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.21
Callahan Associates |

No.5: Historically High Earnings Can Fund Capitalization

Total industry net worth continued to grow; it was up 11.2% to $214.1 billion at the end of 2021. The aggregate credit union net worth ratio remained a healthy 10.3% of assets.

Credit unions have plenty of available capital to bolster operations and member support. Upcoming regulatory capitalization changes from the NCUA, however, pose a potential confounding factor. Many credit unions might opt to hold onto excess capital, at least during the transitionary period between the old and new reporting standards. It will be up to credit union leaders to balance their capital usage effectively across their obligations to both their regulators and their member-owners.

NET WORTH AND OTHER CAPITAL
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.21
Callahan Associates |

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Loan balances at credit unions increased $29.9 billion from June 30, 2021, to Sept. 30, 2021, reaching nearly $1.24 trillion at quarter’s end. This 2.5% quarter-over-quarter increase is the largest quarterly loan growth rate for the industry in both dollar and percentage since 2018.

First mortgage and used auto turned out the largest quarterly increases of any major loan product. They were up 3.1% and 3.5%, respectively. Other real estate loan balances were up 1.2%, new auto lending expanded 0.3% despite microchip shortages and supply chain issues and credit card balances expanded for the second consecutive quarter, increasing 2.3% from June 30 to Sept. 30.

QUARTERLY LOAN GROWTH BY PRODUCT TYPE
FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.21
CALLAHAN ASSOCIATES |

Strong loan growth in first mortgages and used auto continued in the third quarter.

Digging deeper into credit union performance, a few notable trends emerge.

Consumer Lending Rebounds To Fuel Loan Generation Growth

Total loan originations at U.S. credit unions hit $594.8 billion through the nine months ending Sept. 30, 2021, surpassing 2020’s record-breaking pace.

At $293.4 billion, consumer lending comprised the largest share of the origination pie year-to-date, growing 23.6% year-over-year and making up nearly half of all loan originations through the third quarter. Credit unions historically thrive in the personal and auto lending space, so an increase in demand here is welcome after two years of mostly flat performance.

YEAR-TO-DATE LOAN ORIGINATIONS
U.S. CREDIT UNIONS | DATA AS OF 09.30.21
CALLAHAN ASSOCIATES |

Commercial loan originations hit an all-time high for the credit union industry.

First mortgage originations totaled $234.0 billion as of Sept. 30 another nine-month record in this hot market. However, growth in this segment has slowed in the past few years, just 10.4% above 2020’s pace through September.

The largest relative jump in year-over-year originations, however, occurred in commercial lending. At $33.6 billion through Sept. 30, 2021, originations were 37.9% higher than the year prior. The third quarter of 2021 was the most successful quarter of commercial loan generation for credit unions on record, perhaps indicating some new success in this historically bank-dominated arena

Asset Quality Continues To Improve

From a risk standpoint, asset quality has improved both year-over-year and quarter-over-quarter. Delinquency and net charge-offs rates are both at some of their lowest levels on record.

As of the third quarter, delinquency was down 8 basis points annually and has been holding steady at roughly 0.46% since the first quarter of 2021. Total net charge-off also decreased at U.S. credit unions, dropping to 0.26%. That’s an improvement of 22 basis points annually and 2 basis points quarterly.

DELINQUENCY RATES
U.S. CREDIT UNIONS | DATA AS OF 09.30.21
CALLAHAN ASSOCIATES |

Asset quality remains strong as delinquency rates maintain record lows.

The Loan-To-Share Ratio Improves

Increased consumer lending coupled with a slowdown in early loan paydown rates helped loan growth outpace share growth quarter-over-quarter for the second consecutive period. As a result, the loan-to-share ratio is up 1.1 percentage points over the past six months, reaching 69.9% as of Sept. 30, 2021. After two years of plummeting liquidity ratios, credit unions are finally starting to find more success utilizing their assets on the lending side of the balance sheet.

LOAN-TO-SHARE RATIO
U.S. CREDIT UNIONS | DATA AS OF 09.30.21
CALLAHAN ASSOCIATES font-variant-east-asian: normal; font-size: 11pt; font-family: Calibri, sans-serif; vertical-align: baseline; white-space: pre-wrap;”> |

The industry’s loan-to-share ratio has begun to increase over the past six months.

On a per-member basis, average loan balances were up nearly $100 from June 30, 2021, and closed the third quarter at $8,673 per credit union member.

At a broader economic level, sustained low interest rates are encouraging members to take out loans. Local economies are reopening and the absence of federal relief means borrowers are not paying down debt quite so early.

All in all, the outlook is rosy for credit union lending in the coming months. The industry has plenty of liquidity on hand after nearly two years of deposit build-up and a large runway to take on strategic portfolio risk. Ultimately, credit unions should be well-prepared to support communities through continued lending production as the nation pushes through the tail-end of the Omicron wave.

Michael Zelna contributed to this reporting.

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