Macro Economic Trends

Economy Grows; Fed Holds Rate Steady

The U.S. economy has seen 20 consecutive quarters of economic expansion as real GDP increased at an annual rate of 3.1% as of March 2019. This is the second largest expansionary decade in the United States since 1900. Stock market troubles and slower GDP growth (2.2%) at the end of 2018 set the market up for recovery in the first three months of 2019. After raising rates four times in 2018, The Federal Reserve is expecting to hold rates steady through 2019, with some talks of potential rate cuts in the future.

The increase in real GDP in the first quarter of 2019 was driven by personal consumption. At $13.1 trillion, personal consumption accounts for 69.1% of total GDP. Over the past 12 months, personal consumption has increased $347.2 billion, or 1.2%, and accounts for 52.2% of the annual real GDP growth. Expenditure on goods contracted for the first time since March 2018, down 0.7% year-over-year. Expenditure on services, on the other hand, increased 2.0% annually and has consecutively posted a positive rate since the first quarter of 2013.

Inflation

Core personal consumption expenditures (core PCE) increased 1.6% annually, slightly below the target inflation level of 2.0%. The Federal Reserve’s preferred measure of inflation, core PCE excludes the more volatile sectors of food and energy to more accurately express the value of the dollar. Over the past three quarters, annual change in core PCE fell incrementally, down from 2.0% in in the third quarter of 2018, to 1.6% in the first quarter of this year.

Employment

There are two ways to look at employment: the labor force participation rate and the traditional unemployment rate. The labor force participation rate measures the ratio of Americans available for work as a percentage of the total population while the unemployment rate is the ratio of Americans without a job who are counted in the labor force as a percentage of the total labor force. The combination of a decline in number of unemployed and labor force expansion contributed to the drop in the unemployment rate. The national unemployment rate dropped from 3.9% at year-end 2018 to 3.6% as of first quarter 2019, the lowest rate since September of 1969. As the unemployment rate falls, so has the labor force participation rate. As population growth outpaces labor force growth, the participation rate lowered from 63.2% in February 2019 to 63.0% in March 2019.

According to the Federal Reserve Bank of Atlanta, wages increased 3.5% nationwide in the first quarter of 2019. Lower-wage workers had the highest relative gains after 21 states and the District of Columbia increased minimum wages. As wage growth (3.5%) outpaces inflation (1.6%), the average employed American is enjoying more purchasing power.

Interest Rates

Adjustments to the federal funds rate is one of the most common monetary policy tools. After four increases to the benchmark interest rate in 2018, The Federal Reserve maintained its target range for the federal funds rate at 2.25%-2.50% in the first quarter of 2019. As the trade war between the United States and China escalates, there is a 55.1% probability of a cut to the federal funds rate, according to Bloomberg. “A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown,” said James Bullard, president and CEO of the Federal Reserve Bank of St. Louis.

“One way to gauge the health of the U.S. economy is to compare the difference between shorter and longer-term interest rates on the yield curve,” adds Sam Taft, assistant vice president of analytics and business development at Callahan & Associates. There are two different measures of the yield curve that can be insightful. The first is the difference between the yield on the 3-month Treasury bill and the yield on the 10-year Treasury note and the second is the gap between the 10-year and 2-year notes.

An inverted yield curve is when the shorter-term yield exceeds the 10-year yield, which has preceded every recession since 1975. On March 22, 2019, the 10-year Treasury note premium over the 3-month yield dipped into negative territory as the 10-year yield (2.44%) fell below the 3-month yield (2.46%) for the first time since July 2007. Since March 22, the 3-month yield has periodically exceeded the 10-year yield, creating this inversion throughout 2019, a possible indicator of an economic recession in the foreseeable future.

Some economists prefer to use the gap between the 10-year and 2-year, as the 2-year yield reflects expectations for Fed policy for a period beyond the next meeting or two. Although it is flattening, the 2-year yield has remained below the 10-year so far. In prior pre-recession periods, a “bear inversion” was observed as front-end rates rose well above inflation, making money expensive and resulting in sluggish economic activity. This time around, market spectators are observing a “bull inversion”. With core inflation below the 2% target rate, yields are being pushed down across the curve, with longer maturity bonds dropping more than shorter-term bonds.

Mortgage Market

According to the National Association of Realtors, U.S. existing home sales fell 4.9% from February to March 2019, the largest monthly decline since November 2015; this trend continued into April as sales fell 0.4% from March to April. Despite advancing 3.8% from February to March 2019, the NAR Pending Home Sales Index, which measures the number of contract signings, declined 1.5% in April, marking the 16th consecutive month of annual decreases. According to Lawrence Yun, NAR chief economist, although “the latest monthly figure shows a mild decline in contract signings, mortgage applications and consumer confidence have been steadily rising. It’s inevitable for sales to turn higher in a few months.”

After steadily rising, the average rates for the 30-year and 15-year fixed-rate mortgages dropped from a year prior as of first quarter 2019 as the Fed signaled it would be patient on rates. The average rate for a 30-year fixed-rate mortgage was 4.27%, down 17 basis points year-over year, while the average rate for the 15-year fixed-rate mortgage dropped 19 basis points over the same period to 3.72%. While rates on fixed-rate mortgages fell, the average rate on a 5-year adjustable rate mortgage climbed 18 basis points to 3.83%.

Household Debt

Total household debt rose for the 19th consecutive quarter, reaching an all-time high of $13.7 trillion as of March 31, 2019. At $9.2 trillion, mortgage balances increased $120 billion from year-end 2018 to March 31, 2019. Moving in an opposite direction, home equity lines of credit, contracted $6 billion to $406 billion over the same period. “Household debt continues to increase nationwide, reaching pre-recession levels,” says Alix Patterson, Callahan’s chief experience officer. “The economy is strong, but consumers and institutions alike must continue to monitor debt levels for indications of financial stress.”

Following a more volatile end to 2018, the first quarter of 2019 has picked up some momentum. Increasing wages, low unemployment, and strong consumer confidence continue the push for the longest U.S. expansionary period. “While the economy is growing, the inverted yield curve and low inflation point to a more cautious economic outlook,” Patterson says. “It will be imperative to monitor how the Fed conducts monetary policy through the remainder of 2019.”

Credit Union Trends

Industry At-A-Glance

Credit unions have a business model distinct from other financial institutions — one in which members are owners, and their financial wellness is the credit union’s top priority. At the start of 2019, one clear priority for credit unions was enhancing the entire member experience — from opening a checking account, to applying for a first mortgage, and everything in between.

While rates are important, it’s not the only part of the credit union experience that matters. It’s more important than ever for credit unions to invest in technology, products, and services for their members and employees. The rise of fintechs and other competition put pressure on credit unions to enhance members’ digital experience in conjunction with physical, in-branch level transactions. “We’re seeing credit unions investing time and energy into creating experiences beyond rates to attract new members,” says Alix Patterson, chief experience officer at Callahan & Associates.

Industry Performance

The number of credit unions in the country declined from 5,646 in the first quarter of 2018 to 5,451 in the first quarter of 2019. As of March 2019, there were 3,350 federally chartered credit unions and 2,101 state-chartered credit unions. The year-over-year decline of 195 credit unions is consistent with long-running consolidation trends.

Despite industry-wide consolidation, credit union performance metrics continue to improve year after year. Total assets increased 6.3% year-over-year to over $1.5 trillion in the first quarter of 2019. Loan balances increased $77.6 billion over the first quarter of last year. Loan growth slowed 1.8 percentage points, from 9.7% in the first quarter of 2018 to 7.9% in the same three months this year. On the other side of the balance sheet, share growth accelerated in the first quarter, up $70.1 billion annually to $1.3 trillion, a 5.8% increase year-over-year.

Investments and cash grew 1.4% over the past year, a change from negative growth the past six quarters, totaling $395.1 billion as of March 2019. Capital growth also accelerated 2.8 percentage points to 9.7% in the first quarter.

INDUSTRY OVERVIEW

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.2019

© Callahan & Associates | www.creditunions.com

Members

Credit unions added 4.6 million members over the year, including 1.1 million in the first quarter of 2019. Annual membership growth decreased 27 basis points year-over-year to 4.0% as of March 2019. In fact, first quarter growth has stayed above 4% for the last three years as more people adopt the industry’s member-focused, not-for-profit financial model.

Employees

Credit unions are also investing in their workforce. Full-time employment is increasing at a faster rate than last year, a 37 basis point increase to 4.6% as of March 2019. Comparatively, part-time employment decreased 9.9% year-over-year. Credit unions currently employ 294,000 full-time employees and 25,000 part-time employees. More workers are entering as full-time employees as opposed to part time as credit unions are offering more competitive wages and benefits. The average salary and benefits per full-time equivalent employee was $79,001 as of March 2019 — a $2,625 increase from March 2018.

Market Share And Member Impact

Credit union market share remains strong in three major loan products — auto, mortgages, and credit cards. In 2019 credit unions have a much larger share of the market in these three areas than they did five years ago.

Credit union auto market share has improved 3.6 percentage points since March 2014. Today, a credit union finances 18.6% of auto loans nationally. First mortgage market share has also grown — it’s up 1.6 percentage points in the past five years to 8.0%. Credit card market share has increased at the slowest rate among the three products — 90 basis points in the past five years to 6.1%.

Credit unions are not only recruiting new members to the movement, they are also enticing members to use more products. A growing membership base runs the risk of diluting penetration metrics; however, that is not currently the case with U.S. credit unions. Credit unions have reported improvements from five years ago in credit card, share draft, and auto penetration. “Although credit unions are doing well at getting members to use them for core checking accounts, we are seeing the credit union value proposition resonate across all segments of the product portfolio – not just checking,” says Patterson.

Total share draft penetration was 58.1% in the first quarter of 2019, the highest percentage yet and up 82 basis points from this time last year. Auto loan penetration increased 60 basis points over the year, to 21.2%. Credit card penetration is at 17.5% for the first quarter of 2019, and real estate penetration held steady at 4.4%.

The average member relationship topped $19,000 for the first time in 5 years, to $19,156 after a $3,175 increase from the first quarter of 2014. Over the past year, loan balances per member were up 5.0% to $8,400, while the average share balance per member, at $10,756, grew at a more tempered pace of 1.6%.

Balance Sheet: Assets

The aggregate loan balance at credit unions nationwide was just under $1.1 trillion in the first quarter of 2019. The 7.9% annual growth in balances, however, was 1.2 percentage points slower than in the fourth quarter of 2018 and 1.8 percentage points slower than in the first quarter of 2018.

Loan Originations

Total loan originations contracted year-over-year for the first time since 2014. In the first quarter of 2019, originations fell 5.5% annually to $111.4 billion year-todate. Consumer loan originations fell 2.4%, or $1.9 billion, from one year ago to $76.8 billion through the first three months of 2018. They accounted for 68.9% of total loan originations year-to-date.

In the first three months of the year credit unions originated $26.0 billion in mortgages. Fixed-rate products make up the lion’s share of mortgage originations, at 63.3% of the total portfolio. Fixed-rate originations totaled $16.4 billion as of March 2019, balloon mortgages were $6.4 million at 24.8% of the portfolio, leaving the remaining 11.9%, or $3.1 billion, to adjustable rate originations. There has been a shift since 2017 as the composition of total mortgage originations have moved to favor adjustable products, considering the rate environment in 2018.

Loan Balances

Despite slowing loan growth, total loan balances increased $77.6 billion year-over-year.

Real estate loans have historically made up majority of the loan portfolio. However, this concentration has fallen 3.0 percentage points in the past five years to 49.6% of total loans in 2019. First mortgage loans outstanding totaled $435.7 billion in the first quarter of 2019, with other real estate loans at $89.8 billion. First mortgages and other real estate loans grew 7.9% and 8.1%, respectively.

Auto loans increased their share of the loan portfolio in that same period, from 31.1% of the portfolio in the first quarter of 2014 to 34.9% in the first quarter of 2019. At the same time, new auto loans grew 98.7% and used auto loans grew 69.5%. “The combination of rising new car prices and the record number of used vehicles on the market, and entering the market off-lease, has contributed to much more competitive pricing dynamics in recent years,” says Sam Taft, Callahan’s assistant vice president of analytics and business development. “With the growth of auto loans over the past five years we have seen a pronounced shift in the makeup of the average credit union portfolio since 2014.”

Total auto loans increased $26.7 billion, or 7.8%, annually to reach $370.3 billion as of first quarter 2019. With annual growth of 8.5%, new auto loans increased $11.6 billion. Used auto loans increased 7.3% to reach $222.9 billion. Indirect loans continued to play a significant role in the auto loan portfolio. These loans expanded 11.2% year-over-year to close the quarter at $225.4 billion. They comprised 60.9% of total auto loans in the first quarter, up from 59.0% one year ago.

Credit card balances rose $4.4 billion, or 7.7%, annually to $61.6 billion. Other real estate loans increased 8.1% during the same period and reached $89.8 billion. Other real estate loans was the only major lending category to grow faster this year than last.

Asset Quality

Delinquency at U.S. credit unions was 0.58% in the first quarter of 2019, an 8 basis point improvement over the year, and the lowest level it has been since 2007. First mortgage loans had the lowest delinquency of any loan type, at 0.39%, a 3 basis point improvement from the year prior. This is also the lowest level first mortgage delinquency has been since June 2007. Auto loans also had a nearhistorically low delinquency rate in the first quarter of 2019 at 0.53%, a 2 basis point improvement year-over-year.

Credit unions should continue to monitor credit card delinquency, the only loan product to increase delinquency rates over the year. At 1.26%, credit card loans have the highest delinquency rate of any loan product.

Although the total net charge-off ratio has increased over the past five years, it has improved from 2018 levels. In the first quarter of 2019, the net-charge off ratio decreased 3 basis points, from 0.60% in the first three months of 2018 to 0.57% by March 2019. The increase in total net charge-offs from 2015 to 2018 can be attributed to increased credit card charge-offs during that period.

Investments

The investment portfolio at most credit unions can be used to support loan growth. As

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1. Mortgage production flourished

Mortgage production in the United States approached $4.4 trillion at year-end 2020. The Federal Reserve cut rates to near zero at the beginning of 2020. In response, the first mortgage market flourished and total originations grew 63.6% from year-end 2019 to year-end 2020.

MORTGAGE ORIGINATIONS AND TOTAL GROWTH

HMDA REPORTING INSTITUTIONS | DATA AS OF 12.31.20

Mortgage origination contributed greatly to overall loan growth in 2020. Total originations grew 63.3% year-over-year.

Mortgage finance companies reported the largest growth in mortgage originations at 89.7% annually. Credit unions followed closely with 71.6% annual growth, accounting for $316.7 billion in total originations. Notably, credit unions gained 34 basis points in market share to hit 7.3%, whereas banks lost 8.2 percentage points. Banks originated 35.6% of total mortgages in 2020; mortgage finance companies originated 57.1%.

Credit unions, banks, and mortgage finance institutions must report HMDA data if they have $47 million or more in assets, have a branch or home office in a metropolitan statistical area, and have originated at least 25 closed-end mortgage loans or at least 500 open-end lines of credit during the prior two calendar years. Callahan & Associates MortgageAnalyzer allows users to analyze mortgage data by loan purpose, MSA, and more.

2. Refinances anchor mortgage origination growth.

Refinances predominantly drove first mortgage growth throughout 2020. These are a relationship-driven loan type with which credit unions have historically thrived.

Total refinances across the industry increased 125.2% year-over-year; purchase loans increased only 14.0% annually. Refinances accounted for 62.3% of all originations in 2020 and 61.6% for credit unions alone. Purchases comprised 30.0% of credit union originations, home improvements made up 4.5%, and the remaining 3.2% fell into the other loan purpose category.

MORTGAGE ORIGINATIONS BY PURPOSE

HMDA REPORTING INSTITUTIONS | DATA AS OF 12.31.20

Thanks to near-zero interest rates throughout the year, refis drove total mortgage growth in 2020.

3. Credit union mortgage market strongholds bulk up even more.

The 10 metropolitan statistical areas in which credit unions hold the strongest mortgage market share have expanded 2.6 percentage points on average since 2019.

At year-end 2020, credit unions held the largest market share 48.4% in Cedar Rapids, IA. Credit unions in Garden City, KS, almost doubled their market share from 24.9% in 2019 to 43.9% in 2020.

TOP 10 MSAs IN CREDIT UNION MARKET SHARE

HMDA REPORTING CREDIT UNIONS | DATA AS OF 12.31.20

Midwestern credit unions led the way in property-secured lending. Eight of the top 10 MSAs for credit union market share in 2020 were in Midwestern states.

Credit unions turned out a record year for mortgage growth in 2020. Borrowing spiked when the Fed cut interest rates, and cooperatives stayed true to their mission by minimizing costs and extending smaller loans to more members. As the mortgage lending marketplace continues to evolve and digitize, credit unions would be well-served to continue evaluating processes to ensure the institution is positioned to serve current and future members.

2020 Home Mortgage Disclosure Act (HMDA) data is here and in MortgageAnalyzer. This tool allows credit unions to identify industry leaders as well as better understand their position and strategy moving forward. Request a custom Real Estate Lending Trends Analysis to see the data in action for your credit union.

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Credit unions granted $175.4 billion in loans in April, May, and June the most in any quarter on record. Mortgage originations, led by a surge in refinances, largely fueled this growth as homeowners and homebuyers alike took advantage of low rates.

When the uncertainty surrounding COVID-19 was near its peak in March, few would have predicted the record growth financial institutions would recorded in the coming months. The following three lending trends, in particular, could offer insight into where the industry will stand in 2021.

No. 1: Asset Quality Improves but the effects of forgiveness and deferral policies remain unclear.

The asset quality ratio defined as the delinquency ratio plus the net charge-off ratio improved 10 basis points during the second quarter, dropping to 1.11% as of June 30, 2020. Both the net charge-off ratio and the delinquency ratio fell 5 basis points to 0.53% and 0.58%, respectively from March 31, 2020.

Likewise, loans that have been delinquent for fewer than six months decreased significantly during the second quarter. Loans with a late payment of 30 to 60 days fell $5.7 billion, or 55.1%, from the first quarter. It is important to note these are not included in total reportable delinquency; however, early stage delinquency is an important harbinger of official delinquency increases. Loans that have been delinquent for more than six months increased 7.9% during the second quarter. Overall, delinquent balances have declined $198.0 million in the past 12 months and $502.4 million in the past three months.

Although overall asset quality has improved during the past year, loan forgiveness and payment deferral policies spurred on by the pandemic have created a lot of ambiguity in asset quality metrics. As such, credit unions should monitor their portfolios as well as indicators that shed light on the general state of member financial wellbeing, such as the fact unemployment remained at an elevated 11.1% as of June 30, 2020.

As loan forgiveness and payment deferral programs begin to expire, many consumers will face significant financial hurdles brought on or exacerbated by the pandemic. Credit unions would be wise to get ahead of possible deteriorating asset quality by using lessons learned during the Great Recession to inform their path forward.

DELINQUENT LOANS

FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.20

SOURCE: Callahan & Associates

Asset quality has improved over the past year; however, credit unions should continue to monitor this metric as long as pandemic-related restrictions are in effect and unemployment remains high.

No. 2: PPP And Mortgage Sales Lift Earnings but they are unlikely to have a long-term effect on non-interest income.

Gains on PPP loans and mortgage sales to the secondary market have contributed greatly to credit union earnings this year. Performance here has partially made up for the operating income lost as consumer spending slowed and interchange income from debit and credit card usage dropped. First mortgage sales to the secondary market increased 121.3% from June 30, 2019, accompanying a 94.0% jump in first mortgage originations. Secondary market sales reached $51.7 billion or, 39.8% of the $130.0 billion total in mortgage originations through June 30. That’s an increase of 4.9 percentage points from the year prior.

Mortgage production has been the catalyst for loan growth during the past year. However, experts predict it will slow, making supplemental income from secondary sales a one-time benefit. The Mortgage Bankers Association (MBA) forecasts first mortgage originations across all financial institutions will total $638.0 billion in the second quarter of 2021 a potential 31.3% annual decrease from originations between March 31 and June 30, 2020. This is a considerable difference compared to the 85.2% growth from June 30, 2019, to June 30, 2020.

To maintain strong growth in lending, credit unions must continue to open other lending pipelines, particularly in consumer products, as the economy recovers from the COVID-19 pandemic.

ORIGINATIONS AND SALES TO THE SECONDARY MARKET

FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.20

SOURCE: Callahan & Associates

Sales to the secondary market as a percentage of mortgage originations increased 4.9 percentage points during the past 12 months, hitting 39.8% at midyear.

No. 3: Troubled Debt Restructured Loans Are Low but past performance suggest they will climb higher.

Member relief programs, such as deferrals on loan payments, implemented in the wake of the pandemic have contributed to a decline in loan balances reported as total troubled debt restructured (TDR). As of June 30, 2020, TDR loans totaled $7.8 billion that’s a 10.0% decrease from the year prior and the lowest amount since March 31, 2011. Additionally, the total number of TDR loans approved year-to-date declined 40.7% from June 30, 2019.

In the past, credit unions have willingly restructured loan conditions to help members pay their loans and ease the pressure of a borrower’s financial difficulties. In the second quarter of 2020, 0.68% of total loans were TDRs. Comparatively, in the second quarter of 2009, 0.63% of total loans were TDRs. The percentage of TDR loans to total loans increased in the years following the Great Recession until it peaked at 1.76% in 2013.

Today, credit unions are once again deploying programs to assist members during financially difficult times. This should hold true looking forward to 2021.

OUTSTANDING TDR LOANS AND GROWTH

FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.20

SOURCE: Callahan & Associates

At $7.8 billion, TDR loans are at a near historical low. TDRs reached their lowest total, $7.7 billion, in the first quarter of 2011.

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HMDA requires lending institutions that meet certain criteria to report mortgage origination information. All credit unions, banks, savings associations, and other mortgage lending companies must report HMDA data if they meet all the following criteria: have $45 million or more in assets, and have a branch or home office in a metropolitan statistical area, and originated at least 25 closed-end mortgage loans in the prior two calendar years or originated at least 500 open-end lines of credit in the prior two calendar years.

According to the most recent HMDA data set released by the FFIEC, mortgage production in the United States approached $2.7 trillion at year-end 2019. Credit unions accounted for $184.6 billion, or 6.9%, of the total market. In combination with 5300 Call Report data, HMDA data in Callahan’s Peer-to-Peer software allows users to analyze mortgage data on an institution level and in several different ways.

Here are four ways credit union can use HMDA data to improve their mortgage business.

No. 1: BENCHMARK the funding-to-approval ratio.

Credit union performance ratios enable credit unions to benchmark themselves against other institutions in the surrounding market. A credit union that has a lower than average funding-to-approval ratio would want to re-examine its pricing strategies or operational practices to determine whether they are contributing to higher abandonment. The average percentage of total applications funded for HMDA reporting credit unions across the country was 90.1% as of year-end 2019, and 95.6% for HMDA reporting banks.

PERCENT OF APPLICATIONS FUNDED

HMDA REPORTING CREDIT UNIONS | DATA AS OF 12.31.19

Callahan & Associates | CreditUnions.com

The funding-to-approval rating for credit unions across the country increased 56 basis points in a year to 90.1% by Dec. 31, 2019.

No. 2: IDENTIFY opportunities for new product offerings.

HMDA data captures the wide breadth of mortgage financing credit unions are extending to members. For example, loan funding volume by loan purpose includes purchase, refinance, and home improvement; loan type includes conventional, FHA, VA, and FSA; lien type includes first and subordinate; and occupancy status includes owner occupied and non-owner occupied. Data like this helps credit unions identify new products that could be popular based on the product composition in their market.

LEADERS IN CLOSED-END MORTGAGES BY TYPE

HMDA REPORTING CREDIT UNIONS | DATA AS OF 12.31.19

Callahan & Associates | CreditUnions.com

No. 3: EVALUATE secondary market purchasers.

Selling mortgages to the secondary market can help credit unions mitigate risk in a changing rate environment and can open opportunities to serve more members. In 2019, HMDA reporting credit unions sold $55.9 billion, or 35.9%, of originated mortgages to the secondary market. The largest purchaser of credit union mortgage loans was Fannie Mae, which bought 41.5% of originations sold. Through the first quarter of 2020, credit unions have sold $18.2 billion first mortgages accounting for 36.0% of total mortgage originations.

SECONDARY MARKET PURCHASER COMPOSITION

HMDA REPORTING CREDIT UNIONS | DATA AS OF 12.31.19

Callahan & Associates | CreditUnions.com

HMDA reporting credit unions sold $23.2 billion to Fannie Mae in 2019.

No. 4: ASSESS a credit union’s presence in the millennial market.

Trends in mortgage market share across age ranges highlight the differences in mortgage borrowing across generations. Armed with this data, credit unions can devise strategies to target specific segments within a broader membership base. As of Dec. 31, 2019, HMDA reporting credit unions in Iowa held the highest concentration of borrowers between the ages 25-45 54.1% of all closed-end loans funded.

BORROWER AGE COMPOSITION

IA HMDA REPORTING CREDIT UNIONS | DATA AS OF 12.31.19

Callahan & Associates | CreditUnions.com

26.7% of closed-end mortgage recipients in Iowa were between 34 and 44 years old.

For more information about how to analyze HMDA data in Peer-to-Peer, check out Callahan’s one-page tip sheet. To make the analysis even easier, the firm has created a HMDA Reporting Credit Unions peer group in Peer-to-Peer. This group contains all credit unions that have reported at least one closed-end mortgage application. To explore HMDA data for specific markets down to the county or MSA level, see Callahan’s MortgageAnalyzer tool.

Request A Mortgage Market Intelligence Scorecard

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• Loan originations set new record highs for the past three quarters, wrapping up a decade of growth.

• Penetration rates continue to rise alongside membership, showing that American consumers are joining and engaging.

• Auto lending continues to be where credit unions have the highest market share, despite a slowdown in indirect lending growth.

Building on momentum that began in the depths of the Great Recession, credit unions wrapped up 2019 by extending the most credit in the form of $158.2 billion in loan production in a single quarter in the movement’s century-long history. In fact, that record was set and extended each of the past three quarters.

While auto loan growth has slowed as the result of a shift away from indirect lending, lending to homebuyers more than made up the difference. Total first mortgage originations over the past 12 months reached $557.5 billion, after a $511.2 billion year in 2018, both record years.

Overall, in the decade following the Great Recession, cooperatives nationwide expanded assets 76.8% to $1.5 trillion as of year-end 2019. Over that time, membership grew 33.6% to 121.8 million, loans were up 93.1% to $1.2 trillion, shares surged 75.1% to $1.3 trillion, and the number of full-time equivalent employees expanded 36.3% to 316,623.

Growing Membership Engagement

Adding members and deepening their relationships has been integral to the success credit unions have experienced over the last decade. Credit union membership totaled 121.8 million by the end of 2019, a 3.6% increase from the year prior. Credit unions added just under 4.3 million members in the past 12 months.

Engagement measures also show continued strength. Penetration rates can be pushed up by reducing member rolls, through purging inactive accounts, for instance. That’s not what’s happening here. New members are being added, and they’re using their credit unions products and services.

For example, average member relationship, the combined loan and share balances per member (excluding business loans), is up 35.2% since 2009 to $19,472 as of December 2019. In the past year, the average loan balance per member grew 1.9% to $8,613 while the average share balance jumped 4.4% year over year to $10,860.

Credit unions opened almost 1.1 million share draft accounts in the fourth quarter alone, another sign of deeper relationships between members and credit unions. Share draft penetration, an indicator of whether members use their credit union as a primary financial institution, expanded 1.1 percentage points over the last 12 months to 58.8% at year-end 2019. This is up 12.2 percentage points over the decade and is an all-time high for the industry.

Total shares increased $101.5 billion, or 8.2%, in the last year, totaling $1.3 trillion as of the fourth quarter. Certificates continued to increase at the fastest annual rate, up 20.5% year-over-year. Over the last 12 months, certificates accounted for 48.6% of total share growth. The overall inflow of deposits has pushed the loan-to-share ratio down between the third and the fourth quarter for the first time since 2015.

LOAN, SHARE, AND MEMBER GROWTH

FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.19

Callahan & Associates | CreditUnions.com

Despite slowing loan and member growth over the past 12 months, credit unions report strong expansion through December 2019.

SHARE GROWTH CHANGE

FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.19

Callahan & Associates | CreditUnions.com

Certificates grew 20.5% year-over-year, comprising 48.6% of overall share growth in 2019.

LOAN-TO-SHARE RATIO

FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.19

Callahan & Associates | CreditUnions.com

As share certificate specials brought in deposits, the loan-to-share ratio decreased between the third and fourth quarter for the first time since 2015.

LOAN ORIGINATIONS

FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.19

Callahan & Associates | CreditUnions.com

1st mortgage production expanded 28.2% year-over-year, spurring total year-end loan origination volume to the highest levels ever reported.

LOAN COMPOSITION

FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.19

Callahan & Associates | CreditUnions.com

At the expense of auto loans, first mortgages make up a greater portion of the loan portfolio than last year.

NET INTEREST MARGIN VS. OPERATING EXPENSE RATIO

FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.19

Callahan & Associates | CreditUnions.com

The industry’s net interest margin fell back below the operating expense ratio, reflecting the increase in deposits paying higher interest rates.

Increased Lending

Credit unions wrapped up the decade with the largest three-month loan origination volume on record. In the fourth quarter alone, credit union loan production reached $158.2 billion. This is the third consecutive quarter of record quarterly origination levels. In the three months between April and June, loan production at credit unions nationwide was $136.7 billion; between July and September, credit unions originated $151.1 billion. In 2019, credit unions originated $557.5 billion in loans, more than any year on record. This is up 9.1% year-over-year from $511.2 billion reported in 2018.

Mortgage lending fueled loan production in 2019. Year-end first mortgage originations increased 28.2% year-over-year to $178.4 billion, another industry record. Consumer originations increased modestly, up 2.2% over the last 12 months. This is largely a result of slowing auto loan growth. Auto balances increased 2.5% year-over-year, on the back of decelerating indirect lending, which was up 2.7% annually as of the fourth quarter.

Credit unions nationwide continue to push their product usage rate up as they deepen and diversify relationships with members. More than one in five members has an auto loan with their credit union. Auto loan penetration increased 7 basis points annually to 21.3% by year-end 2019. Additionally, credit card penetration expanded 13 basis points over the year, and 3.3 percentage points over the decade, to 17.9% as of year-end 2019.

Market share at the nation’s cooperatives also grew over the decade. The industry’s share of revolving consumer loans reached 6.2% at the end of the decade, up from 3.9% in 2009. Credit unions reported 21.7% market share in auto loans in the fourth quarter of 2019, which continues to be where cooperatives are most competitive. This is up 5.5 percentage points over the last 10 years. Credit unions share of the mortgage market increased 3.8 percentage points since year-end 2009 to 8.6% at year-end 2019.

The Bottom Line

Credit unions are managing their bottom line well. Revenue totaled $82.7 billion at year-end 2019, an 11.2% increase from the year prior. Interest income expanded 13.5% annually, while non-interest income increased 7.1%. The industry’s ROA was 0.93% at the end of 2019, up 1 basis point from year-end 2018.

Nationally, the net interest margin expanded 4 basis points year-over-year to 3.17% as of the fourth quarter but contracted 2 basis points from the third quarter of 2019. This is due to funding expenses growing at a faster pace than interest income because of sustained certificate growth and flat loan yields.

The net interest margin fell back below the operating expense ratio after briefly rising above operating expense in the previous quarter, a change mostly driven by the influx of shares attracted by rising deposit and certificate rates. That creates more liquidity for credit unions to do what they do best: extend credit.

The post A Landmark 2019 Puts The Wrap On 10 Years Of Growth appeared first on CreditUnions.com.

In the broader financial services industry, banks and credit unions have reported improved earnings following the 2018 rate cuts; however, increases in interest expenses have accelerated in recent quarters, putting downward pressure on margins.

Key Points

• Investment income increased 23.2% year-over-year, pushing yield on investments up 42 basis points.
• At $4.7 billion, interest income from loans contributed 73.1% of the total year-over-year increase in revenue.
• Total revenue grew 11.79% year-over-year to $61.4 billion at the end of the third quarter, driving ROA to 0.98%.
• The industry’s average net worth ratio was 11.4% as of Sept. 30. More than 98% of credit unions reported a well-capitalized net worth ratio of 7% or higher.

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TOTAL REVENUE AND ANNUAL GROWTH

TOTAL REVENUE AND ANNUAL GROWTH

FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.19

Callahan & Associates | CreditUnions.com

A 14.7% annual gain in interest income largely drove revenue growth in the third quarter.

NET INTEREST MARGIN VS. OPEX

NET INTEREST MARGIN VS. OPEX

FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.19

Callahan & Associates | CreditUnions.com

The net interest margin and the operating expense ratio increased 7 basis points each in the last 12 months, reaching 3.20% as of Sept. 30.

RETURN ON ASSETS

RETURN ON ASSETS

FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.19

Callahan & Associates | CreditUnions.com

ROA approached 1% in the third quarter of 2019. In the past five years, ROA has increased 15 basis points to 0.98%.

The Bottom Line

The 2018 rate hikes presented latent benefits to credit union earnings in 2019. As loan yields moved modestly higher, year-to-date net income at U.S. credit unions reached $11.1 billion as of Sept. 30, 2019. That’s 7.9% more than the same time last year. Interest income increased 14.7% annually to $46.1 billion as credit unions took advantage of the growing mortgage refinance market that declining interest rates brought on. Strong earnings in the past 12 months pushed up ROA by 2 basis points annually. That reached 0.98% in the third quarter of the year. And, at 11.5%, the annual growth in capital was the highest since 1999. With rising earnings and capital, credit unions are well positioned to make member value investments in 2020.

This article appeared originally in Credit Union Strategy & Performance. Read More Today.

The post Industry Trends: Earnings (3Q19) appeared first on CreditUnions.com.

The Federal Reserve increased its benchmark interest rate four times in 2018 and cut it three times in 2019. But as the Fed raised rates last year, member demand for higher-yielding term deposits likewise increased, causing credit unions to reprice in 2019.

Key Points

• Deposit balances have increased by $84.7 billion in the past year to top $1.3 trillion as of Sept. 30, 2019.
• In the third quarter of 2019, 58.6% of members held a share draft account with a credit union.
• The average share balance at U.S. credit unions increased to $10,710 in the third quarter.
• Share certificate growth was 22.2% as of Sept. 30. This segment added $12.8 billion to total deposits in the third quarter alone.
• IRA/Keogh balances reached $81.3 billion in the third quarter. The 3.6% year-over-year growth rate was the fastest for this segment since 2010.

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SHARE GROWTH BY TYPE

SHARE GROWTH BY TYPE

FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.19

Callahan & Associates | CreditUnions.com

With annual growth of 22.2%, certificates drove total share growth in the third quarter of 2019.

DEPOSIT PORTFOLIO

DEPOSIT PORTFOLIO

FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.19

Callahan & Associates | CreditUnions.com

Core deposits composed of regular shares, share drafts, and money market accounts accounted for 72.4% of total deposits at U.S. credit unions.

LOAN-TO-SHARE RATIO

LOAN-TO-SHARE RATIO

FOR U.S. CREDIT UNIONS | DATA AS OF 09.30.19

Callahan & Associates | CreditUnions.com

The third quarter’s share growth (6.9%) outpaced loan growth (6.0%), resulting in a drop in the loan-to-share ratio for the first time in six years.

The Bottom Line

Interest rate increases in 2018 pushed credit unions to reprice deposits. Consequently, the cost of funds increased 26 basis points year-over-year to 0.99% as of Sept. 30, 2019. However, higher-yielding term deposits enticed members to park their cash with their credit union. Balances in share certificates grew 22.2% and accounted for 60.2% of total annual deposit balance growth. Notably, the third quarter marked the fourth consecutive quarter of accelerated total deposit growth.

Also notable, the quarter’s deposit performance resulted in slightly eased liquidity pressures. The average loan-to-share ratio fell year-over-year for the first time in six years. At 84.1%, it was 78 basis points lower than in the third quarter of 2018.

This article appeared originally in Credit Union Strategy & Performance. Read More Today.

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