This year, with consumers now fully removed from pandemic-era assistance, credit union liquidity is being put to use more rapidly. Inflation surged to 9.1%, according to CPI inflation data, driving up members’ cost of living and leading to increased demand for financing. The Federal Reserve is taking a hawkish stance on interest rates, with the main goal being to ease inflation. Despite rising rates, elevated asset prices remain for the time being, and consumer loan balances are correspondingly booming at record rates.

Callahan’s quarterly Trendwatch webinar covered all this and more, highlighting key financial performance trends in the credit union industry, as well as the overall state of the marketplace. Red on for five takeaways from the data.

No.1: Market share rising in key loan categories

MARKET SHARE
FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.22
Callahan Associates |CreditUnions.com

• The credit union industry made significant headway in gaining market share year-over-year in both the auto loan and first mortgage markets.
• Indirect loans are a major factor of why market share increased nearly 5.0 percentage points from last year’s first half. Consumers are more likely to search for car loan originations through fintech companies, and credit unions are making a concerted effort to build those partnerships.
• With home prices at record highs and rates rising, nationwide home financing has fallen from its 2021 record pace. However, credit unions have maintained member demand better than banks and online lenders, leading to a record high origination market share above 8%.

No.2: Annual loan growth reaches record highs

LOAN GROWTH
FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.22
Callahan Associates |CreditUnions.com

• Loans reported their best year-over-year growth on record as members repurposed excess cash balances to purchase and subsequently finance higher-priced homes and vehicles.
• Rising asset prices are a factor behind loan growth, as consumers take on a larger balance with each new loan now than they did a year ago. Rising asset prices have also allowed borrowers to dip into their home’s equity, as quarterly growth for other real estate surpassed quarterly first mortgage quarterly by a margin of 11.2% to 5.4%, respectively.
• All major loan products experienced double-digit growth year-over-year. Commercial loans and new autos reported the largest percentage increase on the consumer side at 23.6% and 17.4% each.

No.3: Loan-to-share ratio creeping back up

LOAN -TO- SHARE RATIO
FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.22
Callahan Associates | CreditUnions.com

• The loan-to-share ratio surpassed 70.0% for the first time since December 2020, as credit unions lent funds to their community members.
• Credit unions are holding fewer funds in cash, repurposing these low-yielding balances into loans as consumer demand for financing surged in June 2022. The industry experienced the biggest quarterly decline in cash on record, at 28.6%.
• The loan-to-share ratio saw the biggest quarterly increase in history at 4.5 percentage points quarter-over-quarter. Credit unions are deploying their deposits more effectively than they have been able to in recent years, serving more members and generating higher yields because of it.

Share growth slows across all products

SHARE GROWTH
FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.22
Callahan Associates | CreditUnions.com

• With the federal relief from COVID-19 coming to a halt last year, total share growth has decelerated since peaking in March 2021. In the second quarter of 2022, the industry experienced an 8.2% year-over-year increase in total shares, down from 15.0% last year.
• Current interest rates on historically high-paying accounts continue to be unattractive to members. Only core accounts experienced year-over-year growth this quarter, as share certificates and IRAs declined by 7.3% and 1.2%, respectively.
• The average share balance per member grew by 4.4% annually, compared to 11.0% last year. Members are saving at a slower rate than a year ago, with no more federal assistance and an increase in the cost of living.

Total revenue surges thanks to loan and investment income

REVENUE
FOR U.S. CREDIT UNIONS | DATA AS OF 06.30.22
Callahan Associates |CreditUnions.com

• Loan and investment income, being tied to the most rate-sensitive products, played a key role in total revenue growth. These key categories grew by 6.8% and 39.1% on an annual basis, respectively. Net interest margins were also bolstered by the rising loan-to-share ratio, as more assets were earning the higher loan yields versus the lower investment yields. All told, industry revenues grew 4.5% year-over-year.
• Other operating income declined 16.7% year-over-year, as cooperatives kept more first mortgage loans on their balance sheets rather than selling them to the secondary market.
• Net income declined by 15.4% as annual expense growth of 9.5% outpaced revenue growth. Even so, ROA remains a healthy 0.86%. Part of the increase in costs went toward investment in operational improvements that are expected to be beneficial for member service.

The post 5 Takeaways From Trendwatch 2Q 2022 appeared first on CreditUnions.com.

The pairing is part of a slowly building colocation trend, that has seen credit unions share retail spaces with not just bakeries but coffee shops, restaurants, retailers, and more. Those arrangements allow participating credit unions to not only share facilities’ costs but provide additional exposure to non-members who visit the partnering business, and in some cases even earn non-interest income.

For Patelco, the road to colocation began in 2019, after Ameet Seth, the credit union’s head of delivery channels, examined the branch footprint and determined that there was an opportunity to optimize that the two San Ramon, CA, locations.

“We wanted to consolidate those branches to serve our members more effectively and needed an all-new space to do that,” he says. “It’s in the newly built City Center. It’s like their version of a downtown with shops and restaurants.”

The two branches Patelco previously operated in San Ramon had posed a unique set of challenges that could only be addressed by starting over in a new location, explains Seth. One branch had operated out of a single suite in a business building once occupied largely by AT&T, the parent company of Patelco’s original sponsor Pacific Telephone & Telegraph, or PacTel. Most of the building has since been occupied by other businesses as AT&T has consolidated operations over the years. The credit union’s main branch in San Ramon had operated in the Crow Canyon area, which was becoming more isolated from the newer developments and higher traffic shopping areas of the city.

In-branch transactions at Patelco have declined in recent years, but whereas most credit unions attribute this kind of decline to the industry’s movement away from branches, Patelco has a different approach to its physical branch network.

“For us, [branches] are even more relevant,” says Seth, who explains that Patelco’s branches are places to meet members for financial counseling, help with lending, host seminars, and provide financial education. “We don’t view them as just transaction centers. We are heavily focused on how we can drive more engagement with our members.”

After closing the SEG location in 2020, Patelco focused on relocating the Crow Canyon branch to a place that would be more beneficial in the long term. The credit union reached out to developers who were beginning to construct City Center, a shopping complex that mimics a downtown in what is a sprawling network of towns in the East Bay area of San Francisco. City Center already had commitments from anchor retail giants such as Williams and Sonoma, along with the Nike Store. Patelco told developers it wanted to create an open floor plan with community space for people to gather and feel comfortable staying a while — a place where conversations could be had instead of people walking in and out for a quick transaction.

What Patelco wanted was a cafe-like environment, and that’s when the credit union started exploring possible partners, leading to connecting with Sprinkles, which also had expressed interest in opening a City Center location. Patelco reached out to the cupcake company, whose casual dining environment and strong social media presence were seen as a complement to what management hoped to create for San Ramon-area members.

Cash And Cupcakes On Demand

The vision for better service involves cash machines, community, and cupcakes.

The 5,400 square-foot space might seem large for a new branch with just two teller pods, but the idea is to be much more than just a branch. The credit union expects to use 30% of the space as a branch, with another 30% dedicated to an open, shared lobby for the two businesses where the credit union can also provide educational workshops. The remaining 40% is occupied by Sprinkles, which began in Hollywood in 2005 and has since spread its cupcake love nationwide, with 22 locations coast to coast.

The shared space is Sprinkles’ first Northern California location. Patelco is the primary lease-holder, but Sprinkles subleases nearly 2,200 square feet from the credit union.

Along with teller pods, the branch also has two ATMs — one to dispense cash and one to provide freshly baked cupcakes on demand.

Each business makes the most of its own expertise, Seth says, and those individual strengths make the partnership successful.

“They are not experts in financial services, and we are not experts in cupcakes,” he explains. “While their customers are enjoying a cupcake, they’re having conversations about Patelco. It’s a good partnership.”

Aside from the enticing aroma of fresh cupcakes and warm frosting, the new space provides something more for everyone.

“It’s the community piece that we truly believe in,” Seth says. “This is the missing piece in San Ramon. Similarly, our members can come in, slow down, and enjoy the space instead of just coming in for a transaction and leaving.”

Seth admits it’s a partnership that works for Patelco in San Ramon but not necessarily at its other branches. He says Patelco is open to examining the concept for other branches, but even with the initial success over the past year, it’s too early to tell if the concept will translate to different locations or with different partners.

Since its opening last year, new members at this location has increased 65%, Seth says. He notes much of that growth has come from the better location and visibility in San Ramon over the previous two branch locations. However, Seth attributes the success in large part to the partnership with Sprinkles.

“Could this concept work with any brand? Probably not,” Seth says. “Their brand allows people to stay for a while. For us, this partnership worked well from the beginning.”

The post For Patelco, Growth Is The Icing On The Cupcake appeared first on CreditUnions.com.

TOTAL REVENUE AND ANNUAL GROWTH

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

Callahan Associates | CreditUnions.com

First quarter revenue at U.S. credit unions rose by 2.5% thanks to continued growth across the loan portfolio. Overall revenue stood at $21.2 billion as of March 31, 2022, up from $20.7 billion one year prior. Although loan growth played a major role in that jump, credit unions posted growth in other metrics as well. For example, income from investments and fees rebounded after declines in the year ending March 31, 2021.

For more information, watch Callahan’s Trendwatch webinar or read about five major takeaways from first quarter data.

The post Credit Union Revenue Inches Up appeared first on CreditUnions.com.

Meanwhile, Amplify Credit Union ($1.4B, Austin, TX) has eliminated all banking fees on all deposit products for all 58,014 of its individual and business members. The Texas cooperative began publicizing that that on Feb. 2 turning Groundhog Day into Fee Free Day and ending a cycle of financially vulnerable members, in particular, paying such fees over and over again.

Both cooperatives are part of a trend toward lowering or eliminating a lot of those so-called punitive forms of non-interest income, including by some of the major national banks earlier this year.

Members don’t hate fees because they cost too much. Members hate fees because they feel being charged for them is wrong.

Stacy Armijo, chief experience officer at Amplify, says her cooperative’s decision is the culmination of a journey into behavioral economics that began three years ago when Amplify commissioned research on consumers’ motivations around checking and savings accounts.

Members Are Averse To Fees. Really Averse.

“The research was clear that consumers don’t like fees, which was no surprise,” Armijo says. “The key insight was why. Members don’t hate fees because they cost too much. Members hate fees because they feel being charged for them is wrong.”

According to Armijo, “consumers feel taken advantage of when they encounter too many unexpected fees. In fact, they feel so strongly that it can motivate them to switch financial institutions.”

Armijo adds that Amplify’s membership more than at most institutions is particularly averse to fees, so the credit union turned that weakness into a strength. It can do that because it makes more servicing loans for other financial institutions than it does from its own balance sheet, and it has a strong mortgage origination business.

“Together, those functions deliver far stronger non-interest income than could be achieved through deposit fees,” Armijo says. “Best of all, it’s not earned off the backs of our members. We realized we had the potential to leverage our success in serving Texas homeowners and business owners to broaden the value we could deliver to Texans of every income and employment.”

Principle Over Principal

More than 1,000 miles away, United has a slightly different reason for making the same business decision to reduce fees.

Our motivation for eliminating and reducing fees associated with overdraft is simple it’s the right thing to do, says Terry O’Rourke, president and CEO of United FCU. We have the tools to help members avoid overdrawing their accounts, so United is taking a stance to support our members’ financial wellness and provide options that help them avoid fees.

United and Amplify are both aware that members who most need services tied to these fees are also the ones who find the fees most punitive.

“Those who rely on courtesy pay are often the ones least able to afford it,” O’Rourke says. “We’re taking a stance to support our members’ financial wellness and provide options that help them avoid fees.”

Armijo says the same realization emerged from Amplify’s research.

“As we looked deeper into overdraft fees specifically, we were disturbed to find a small portion of our membership was driving most of that income,” she says. Many of those members were spending hundreds, or even thousands, of dollars per year in overdraft fees. As a credit union, we couldn’t feel good about that because it doesn’t live up to our mission of improving the financial lives of our members. We knew we needed to change.

Still Good Business

Neither cooperative expects the income lost from those fees to damage the bottom line. Amplify’s research found members are more interested in avoiding fees than getting a higher savings rate, which makes sense given how low rates are and how easily fees can offset such income. The credit union’s own research found members paid an average of $33 in fees on deposit accounts per year while the vast majority of members earned less than $10 in interest.

Amplify put up several billboards around its Austin-based service area to spread the message about eliminating all of its service fees.

Amplify put up several billboards around its Austin-based service area to spread the message about eliminating all of its service fees.

Amplify put up several billboards around its Austin-based service area to spread the message about eliminating all of its service fees.

Amplify put up several billboards around its Austin-based service area to spread the message about eliminating all of its service fees.

That tradeoff just doesn’t make sense, Armijo says. We believe eliminating fees will help us keep and grow core deposits.

The credit union expects to hang on to more core deposits and accounts and generate more debit interchange income as a result its new fee strategy. Just as important, it gets the credit union out of what Armijo calls the rat race that is chasing deposits with rate. According to the chief experience officer, FIs know high deposit rates attract hot money, which leaves institutions just as easily as it arrives when account holders can make a few more basis points elsewhere.

With that competitive pressure of keeping up with the Deposit Rate Joneses,’ it’s nearly impossible to meaningfully improve net interest margin, Armijo says.

All around, Amplify is confident in its business decision to eliminate fees.

While we’re excited about the member giveback and positive community impact of eliminating fees, this journey began with a business objective, Armijo says. More core deposits = improved net interest margin = more net income.

Do It Now With Eyes Wide Open

O’Rourke at United also says the credit union is confident in its decision to adjust its fees; however, the CEO advises leaders to clearly understand what the impact of losing that fee income will be on their institutions’ balance sheets before committing to lowering or eliminating them.

United Federal Credit Union posted on Facebook as part of its marketing around fee waivers and eliminations.

Consider what’s best for the membership as well as what’s best for the sustainability of the organization, O’Rourke says. An important factor should be the ability to maintain a financially responsible cooperative that can be around for a long time to serve members and make positive contributions to the community.

Credit unions that can’t afford such sharp reductions now should not consider themselves without options, he adds.

Even if a complete overhaul of overdraft fees isn’t possible for your credit union yet, look for other creative ways to reduce fees, educate members on the options available to them, and remove unintentional hardships some programs can create for members, he says.

The post 2 Ways To Approach Fee Relief For Members appeared first on CreditUnions.com.

• New approaches to lending, expenses and culture have helped this small Ohio-based credit union rebound

• CDFI grants were used to cover the costs associated with hiring new employees to serve consumers with less-than-perfect credit while also bolstering loan-loss allowances

After a run of poor performance, Buckeye State Credit Union ($102 million, Akron, OH), has turned the ship around. The key, explains CEO Michael Abernathy, is embracing the things that make it unapologetically different.

Following years of losses including losing about $2 million in 2014 and 2015 Abernathy was brought in as a lending executive as part of a 2016 staff shake-up and was appointed CEO in 2018. Much of the worst was already in the past by that point, but his task since then has been to ensure things didn’t backslide and even find ways to keep growing.

Multiple factors contributed to Buckeye State’s troubles, including conservative leadership that struggled with expense management, insufficient lending, and overconcentration in a costly indirect auto loan program.

The credit union had already begun pulling back from indirect by the time Abernathy took the helm in 2018, with balances in that category falling by more than 51% from their high point at the end of 2015. That trend continued under Abernathy, and balances at the end of 3Q21 stood at about $7.4 million, compared with more than $34 million in 2015. Because of high concentrations in indirect, Buckeye State’s overall loan balances fell as the credit union reduced its indirect portfolio, but loan growth was on the rise again by the end of 2019. Today its lending portfolio is anchored by mortgages and used car loans, along with a sprinkling of credit cards, new auto loans, and other categories.

The Springboard

Abernathy says Buckeye State’s turnaround was helped by a change in culture, which in the past had been too narrowly focused on A-paper borrowers. Rather than prioritize prime-credit consumers, Buckeye State aims to serve a wide spectrum of the market. That includes an increased emphasis on blue-collar members with less-than-perfect credit, and the credit union uses a variety of data and analytics tools as part of its underwriting. Some of that shift was also the result of implementing certain strategies from the University of Lending program by Rex Johnson, a credit union lending guru who passed away in 2021 and preached the value of looking at more factors than just a member’s credit score.

That’s the key change, says Abernathy. “As we started changing some of the culture and some of our lending practices, that was kind of the springboard that started to shift the momentum.”

Today, Buckeye State serves just over 15,000 members, a 17% reduction compared to a decade ago, but as the credit union has expanded its lending base, the average member relationship has also risen. That figure hovered around the $6,000 mark for much of the first half of the last decade but has risen gradually since 2015 with some minor fluctuations to the just over $10,000 as of 3Q21.

Buckeye State has also taken steps to differentiate itself from the competition by providing a positive and comfortable in-branch experience. Visitors can help themselves to fresh popcorn and cold bottles of water, while in-branch TVs play Hulu Live generally ESPN, HGTV or the like and iPads are on-hand to keep kids busy while they wait on their parents. Member service representatives wear jeans and have a business-casual dress code to help put branch visitors at ease.

Buckeye State Credit Union was founded during a time of economic crisis. Now they seek to help Americans emerge from the newest one with an improved outlook. Click here to see firsthand how Buckeye State Credit Union values their members.

“We want to dress and look and feel like the people we’re working with so the conversations flow more smoothly,” he explains. “We’re trying to drop the guard a little bit. It seems like a lot of small things, but the small things add up.”

An e-branch contact center is also intended to improve the service experience for members who need to contact the credit union but can’t come to a traditional branch. Rather than members having to call a branch four or five times to reach an MSR, the e-branch contact center allows faster responses with the same level of service.

CDFI Status An Engine For Growth

Because the credit union was already serving consumers of modest means, Buckeye State sought out certification in 2017 as a Community Development Financial Institution and has received upwards of $2 million in grants from the CDFI Fund. Those grants have helped the credit union bulk up its staffing to better serve riskier borrowers while also beefing up its allowance for loan losses. Risk-based pricing is in place to account for the possibility that borrowers might become delinquent or default on a loan.

Management has also shifted how it thinks about lending, moving from focusing on simply dollars loaned to an emphasis on how much it saves members in interest a figure that topped $2.7 million last year alone, says Abernathy.

Not surprisingly, Buckeye State’s net worth ratio suffered as loan volumes fell and overall performance suffered. Net worth was well above 10% at the start of the decade but by the end of 2016 had bottomed out at 6.34%, under-capitalized by NCUA standards and in need of a net worth restoration plan. Beginning in 2017, management began working to simultaneously cut costs and generate revenue, including closing a branch. After some substantial increases in allowances for credit losses, those allowances slowed somewhat beginning in 2018. Staffing levels were also kept at 2017 levels for a few years, but have generally been on the rise since the end of 2019.

The goal now, says Abernathy, is to keep growing including some merger activity and a new branch and build on the successes of recent years and lessons it learned in the past few years.

“When you’re a $100 million[-asset] credit union with limited resources, we’re not always going to be better than [the competition] and we certainly don’t want to be less than but one thing we can do is be unapologetically different,” says Abernathy. “We can be different on purpose and stand out to the communities we serve and our members as being a true alternative and being truly different from the banks.”

The post How Being ‘Unapologetically Different’ Helped Buckeye State’s Turnaround appeared first on CreditUnions.com.

Despite balance sheet growth continuing at a tremendous pace, reductions in per-asset expenses have generated record earnings for credit unions. Industry leaders must think on how to best convert this strong financial performance into positive community impact as the country works to recover from the chaos of the pandemic.

Here are three takeaways from Tuesday’s webinar:

1. Both spending and saving are on the rise for credit union members.

Between September 30, 2020, and September 30, 2021, share balances expanded 14.4%. This is down slightly from the 18.2% annual growth reported in the third quarter of last year, which had been buoyed by the three federal stimulus checks and unemployment benefits including the CARES Act. This third quarter’s share balances are now a full year removed from the CARES Act’s impact, so slowing growth is mostly the result of baseline changes. Members are still adding money to their credit union accounts at historically high rates.

Share certificates remain unpopular in the low-rate environment, contracting 13.8% from one year ago and comprising 4 percentage points less of the industry’s outstanding share portfolio. On the other hand, regular shares, share drafts, and money market shares expanded their portfolio concentration, accounting for 113.7% of new deposits over the past year. These checking and savings accounts known as core deposits are liquid and accessible, yet are historically stickier share types. Core members make deposits in these accounts, and these funds are more likely to stick around for the longer term than certificates, which often leave the institution when the product expires.

Loan-To-Share Ratio

For All U.S. Credit Unions | Data As Of 09.30.21

The industry’s loan-to-share ratio hit its highest level in more than a decade in the third quarter of 2019. Since then, an influx of Federal relief drove down the ratio until early in 2021, when record originations and a reduction in early low paydowns pushed the ratio back up.

Source: Callahan & Associates.

Despite continued share growth, loan demand has picked up to the point that credit unions are able to lend nearly as fast as the dollars are deposited an uncommon dynamic throughout the pandemic. Year-to-date loan originations the dollar amount of loans granted since the start of the year experienced 19.2% growth annually, fueled by 23.2% annual growth in consumer lending. This is the second consecutive quarter since in which consumer origination growth outpaced growth in first mortgage originations, though mortgage volume remains at all time highs.

Record loan originations have been a theme for a while, but these new loans are finally starting to stick on balance sheets. Outstanding loan balances expanded 5.8% year-over-year. Although annual loan growth did not reach the same level of growth as share balances, loans outpaced shares on a quarterly basis: 2.5% to 2.0% respectively. As a result, the loan-to-share ratio is down 5.7 percentage points year-over-year, but up 30 basis points since June to 69.9%. This is the second consecutive quarter that the loan-to-share ratio increased, having been on the decline since the tail-end of 2019. Throughout the pandemic, members used large portions of Federal Relief to pay down debt early. With no additional Federal relief since March, these early paydowns have slowed, allowing credit unions to more effectively allocate their asset portfolio into productive loans.

This is the second consecutive quarter the loan-to-share ratio increased, having been on the decline since the tail-end of 2019. Throughout the pandemic, members used large portions of Federal relief to pay down debt. With no additional Federal relief since March, these early paydowns have slowed, allowing credit unions to more effectively allocate their asset portfolio into productive loans.

2. Asset quality continues to improve, reaching a historic low.

The asset quality ratio improved again across the third quarter of 2021, reaching a new record low.

Total loan delinquency remained flat from second quarter at 0.46%, the lowest delinquency ratio on record. Of the major loan types, first mortgage delinquency had the greatest improvement on a quarterly basis down 4 basis points to 0.41%. Annually, used auto delinquency improved the most, shrinking from 0.51% to 0.40%. Similarly, net charge-offs have reached a record low of 0.26% of loans. This is down two basis points quarterly and 22 basis points over the past 12 months. Together, the third quarter ended with an asset quality ratio the percent of outstanding loans that are delinquent or charged-off of 0.72%, down 31 basis points from one year ago.

Asset Quality

For All U.S. Credit Unions | Data As Of 09.30.21

Record-low delinquency and net charge-off ratios show asset quality remains strong despite the lack of new federal relief to support loan payments.

Source: Callahan & Associates.

Credit unions nationwide increased their allowance for loan and lease losses accounts at the beginning of the pandemic, yet asset quality is strong and higher default trends have yet to materialize. As a result, credit unions are slowing contributions to their allocation for loan and lease loss accounts this year. Year-to-date provisions contracted 86.8% year-over year, with less than $1 billion total in additions to coverage. Despite a net decline in the industry’s aggregate allowance account for the second straight quarter, the coverage ratio remained nearly double the historical average at 204.6%. For every dollar current delinquent, credit unions have the designated savings available to cover it more than twice over.

Despite a net decline in the industry’s aggregate allowance account for the second straight quarter, the coverage ratio remained nearly double the historical average at 204.6%. For every dollar current delinquent, credit unions have the designated savings available to cover it more than twice over.

3. Earnings are up as credit unions focus on controlling expenses

Return on assets remains at record highs, up 46 basis points year-over-year to 1.11%. The greatest contributor to these high earnings is controlled expense growth. Work-from-home options, limited travel expense, and a surge of low-maintenance cash assets all helped to drive the operating expense ratio down to 2.80%.

Prolonged high asset quality has minimized fears of defaults, allowing credit unions to redirect provision funds into capital growth. Credit unions are spending less to manage each dollar of assets under management, and these cost controls more than make up for the fact that core interest earnings have slowed as spreads remain tight.

Earnings Model

For All U.S. Credit Unions | Data As Of 09.30.21

Expense control bolstered a second quarter of a record-high return on assets ratio.

Source: Callahan & Associates.

Net worth balances are up 10.8% annually, which was surpassed by 13.0% asset growth, causing the net worth ratio to decline 20 basis points annually to 10.2%. So far this year, however, credit unions experienced record earnings, and this key capitalization ratio has risen 22 basis points since March.

Stable capitalization and an overall healthy industry have given credit unions the opportunity to devote more of their resources to positively impact both members and their communities. Be it investing in staff or new technology-focused delivery channels, credit unions have room to take strategic risks and invest in additional operational efficiency.

Net Interest Margin Vs. Operating Expense Ratio

For All U.S. Credit Unions | Data As Of 09.30.21

The net interest margin and the operating expense ratio have moved in lockstep for the past 18 months, yet earnings have grown to record highs. How can credit unions use these earnings to benefit their membership and promote growth?

Source: Callahan & Associates.

Technology is certainly one way to invest in your members, and COVID accelerated that development, says William Hunt, Callahan’s senior industry analyst. Still even new technology delivery channels are table stakes. Almost no one at this point is going to make a decision to join an institution because they have a mobile app or an online website. Credit unions can’t just make an impact, they have to let members know they are being purposeful and are helping financial lives as well as the community as a whole.

The post 3 Takeaways From Trendwatch 3Q 2021 appeared first on CreditUnions.com.

The industry remains well-capitalized for the moment; still, credit union decision-makers are looking for new ways to boost income in 2021 and generate the capital necessary to keep up with continued balance sheet growth.

Last week, Callahan hosted its quarterly Trendwatch webinar. Here are three takeaways.

Learn about quarterly performance trends and glean insights into vital financial and operational metrics in Callahan’s quarterly performance webinar, Trendwatch. Watch today.

1. A second round of federal relief underpinned a continued surge in share balances.

Between March 31, 2020 and March 31, 2021, share balances expanded 23.2%. This is the fastest 12-month rate on record and was driven, in part, by two (and a half) federal relief packages. Core deposit products consisting of share drafts, regular shares, and money market shares accounted for 107.5% of new deposits during the year. Share certificate balances declined 9.3% during the period.

In today’s low-rate environment, cheap, liquid, core deposits helped credit unions reduce interest expenses. As a result, the industry’s average cost of funds declined 44 basis points year-over-year to 0.53%.

On the lending side, non-real estate loan originations were down for much of the past year as quarantines kept members at home and reduced their day-to-day spending. Consumer originations have shown signs of a rebound in the first quarter of 2021, particularly in the used auto space; however, many members have used some of their additional funds to pay off high-interest loan balances, such as credit cards.

The dynamics in the two portfolios combined to drive the industry’s loan-to-share ratio down to 68.7% as of March 31. That’s a decline of 4.5 percentage points from last quarter and 12.4 percentage points from one year ago.

LOAN-TO-SHARE RATIO

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.21

Callahan & Associates | CreditUnions.com

The loan-to-share ratio neared decade-long highs at the end of 2019, and credit unions were worried about liquidity. Those concerns evaporated during the past year as multiple federal relief packages, including one in the first quarter of 2021, underpinned a surge in shares and a drop in the loan-to-share ratio.

2. Record asset growth pushed down capitalization ratios; now credit unions are adjusting their earnings strategies.

Members added deposits faster than credit unions could lend them. Consequently, asset balances at credit unions increased 19.1% year-over-year a 12-month record.

As most members opted to hold their shares in withdrawable core deposit accounts, cash and equivalents up 82.8% annually provided valuable liquidity for credit unions. However, these low-yielding cash balances, in combination with the Federal Reserve rate cuts, suppressed interest spreads at credit unions, and net worth balances grew just 8.3% year-over-year a solid rate, but it lags behind the pace of asset growth. As a result, the industry’s net worth ratio dropped 1 percentage point from one year ago to 10.0% as of March 31, 2021.

NET WORTH AND OTHER CAPITAL RATIOS

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.21

Callahan & Associates | CreditUnions.com

Although capital totals increased year-over-year in dollar terms, capital ratios fell as credit unions adjusted earnings strategies to keep pace with sustained asset growth.

The industry, well aware of its declining capitalization, is deploying new strategies to drive earnings. The return on assets ratio has improved through each of the past four quarters, from a low of 0.52% in the first quarter of 2020 to 1.03% in the first quarter of 2021 the highest of any quarter since 2002.

Interest spreads have yet to recover as benchmark rates remain near zero, but credit unions are generating earnings through alternate routes. The operating expense ratio declined 41 basis points year-over-year to 2.75%, showing credit unions controlled spending even while managing record levels of assets. Non-interest income, led predominantly by revenue from first mortgage sales to secondary markets, was 29.0% higher in the first quarter of 2021 than one year ago. Finally, year-to-date provision expenses declined 66.1% year-over-year. Credit unions now consider themselves well-covered from an asset quality perspective and are redirecting funds toward recapturing capitalization.

EARNINGS MODEL

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.21

Callahan & Associates | CreditUnions.com

Credit unions are using far different methods to generate returns than they were two years ago, but the industry has fully recovered from an earnings perspective and have surpassed pre-Covid ROAs.

3. Delinquency dropped to record lows, continuing to defy expectations from one year ago.

The onset of COVID-19 and subsequent spike in national unemployment prompted credit unions to increase their provision expenses and add funds to their allowance for loan and lease loss accounts. The decline in asset quality that credit unions were preparing for, however, has yet to materialize at the national level.

During the 12 months ending in March 2021, allowance balances increased 26.6% to $12.9 billion; outstanding delinquent loans, however, were down 24.3% to $5.4 billion. The industry’s coverage ratio the amount set aside to cover every dollar in delinquency increased 95.6 percentage points annually to 237.6%. This is the first quarter on record that allowance balances have more than doubled the total amount of delinquent loans.

As with share growth, federal relief has supported asset quality during the past year, leaving credit unions with an open question: Will delinquency remain at record lows if government intervention diminishes? Although no one knows the answer, vaccination numbers and reopened economies have credit unions feeling optimistic enough to focus their resources on other issues such as capitalization and all-time high coverage ratios provide them with the flexibility to do so.

ASSET QUALITY

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.21

Callahan & Associates | CreditUnions.com

Delinquency and net charge-off ratios fell to their lowest levels on record as members used funds from the second round of federal relief to make on-time loan payments.

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Key Points

• Total revenue at U.S. credit unions increased 1.1% only annually. Yields fell faster than the cost of funds, and interest income decreased 1.9% year-over-year to $60.8 billion. This is the first calendar-year decline since 2013.
• Total operating expenses increased 5.9% annually to $51.9 billion as of year-end, outpacing revenue growth. Consequently, net income at U.S. credit unions decreased 15.1% year-over year. Still, credit unions worked hard to cut costs as closed branches and slowed operations contributed to the slowest rate of expense expansion since 2017.
• Non-interest income increased 11.2% year-over-year to $23.9 billion. Fee income declined 10.1% annually as credit unions prioritized member relief. Other operating income, made up largely of secondary sales and interchange income, increased 25.9% and fueled non-interest income growth during the year.

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RETURN ON ASSETS

RETURN ON ASSETS

FOR U.S. CREDIT UNIONS | DATA AS OF 12.30.20

Callahan & Associates | CreditUnions.com

ROA increased 5 basis points during the quarter as credit unions adapted their earnings models to accommodate the economic fallout from COVID-19.

NET INTEREST MARGIN VS. OPEX

NET INTEREST MARGIN VS. OPEX

FOR U.S. CREDIT UNIONS | DATA AS OF 12.30.20

Callahan & Associates | CreditUnions.com

The gap between the net interest margin and the operating expense ratio expanded 14 basis points year-over-year to 19 basis points. To cover expenses, credit unions increased non-interest income, which was up 11.2% annually.

REVENUE AND ANNUAL GROWTH

REVENUE AND ANNUAL GROWTH

FOR U.S. CREDIT UNIONS | DATA AS OF 12.30.20

Callahan & Associates | CreditUnions.com

Interest rate pressures depleted interest income, forcing credit unions to look to other operating income made up largely of interchange and sales to secondary markets to bolster revenue.

The Bottom Line

Credit union earnings rebounded toward the end of the year despite the Federal Reserve holding interest rates at record lows. To overcome earnings challenges resulting from compressed margins, credit unions turned to non-interest income streams, particularly mortgage sales to secondary markets. Institutions also considered their strong asset quality and accordingly decreased their provision allocation, which was $830.1 million lower in the fourth quarter than in the third. These strategic pivots kept revenue growth positive during the year, and drove a 5-basis-point increase in ROA across the fourth quarter. Credit unions are finding ways to adapt their business models to the changing economic landscape.

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

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Regardless of strategy differences, 2020 has proven to be a year like no other for credit unions across the United States. From the third quarter of 2019 to the third quarter of 2020, rate cuts at the Fed, balance sheet growth that far surpassed income growth, a jump in provision expenses in preparation of diminished future asset quality, and more have put pressure on ROA. The end result: Credit unions nationally reported an annual decline of 32 basis points in ROA. During the same period, net worth ratios at U.S. credit unions fell 95 basis points. Like the downward pressure on ROA, asset growth not capital erosion was the primary contributor to the decline.

EARNINGS MODEL COMPARISONS

FOR U.S. CREDIT UNIONS | DATA FOR 09.30.19-09.30.20

Callahan & Associates | www.creditunions.com

Despite annual deterioration of earnings model metrics through the third quarter, a quarterly view shows credit unions earnings are beginning to rebound.

The picture might appear bleak at first blush; however, when economic conditions are rapidly evolving such as during a recession or global pandemic comparing changes in earnings and capital on a quarterly basis can yield deeper insight.

At the onset of the COVID-19 pandemic in the United States, credit unions adopted a cautious approach to risk management following state and local restrictions, economic relief packages, and changes to Federal monetary policy in March and April. Provision expenses rose substantially in the final weeks of the first quarter increasing 25.3% from one quarter earlier and 33.6% from one year earlier and ultimately pushed down ROA 41 basis points lower than at year’s end.

Industry challenges became even more pronounced in the second quarter. Credit unions braced for the possibility of widespread credit deterioration, causing provision accounts to rise more than 50% annually. At the same time, lagging consumer loan demand and rapidly declining investment yields following the Fed’s rate cuts in March slowed revenue growth.

Throughout the second quarter, credit union members and consumers nationwide aggressively saved excess income and stimulus funds. The result was record deposit balances and ballooning cash positions in investment portfolios as credit union lending departments struggled to keep pace with share inflows despite strong mortgage demand. Consequently, surging asset growth caused many earnings model and balance sheet ratios to deteriorate.

However, with the arrival of summer and lightened restrictions in different regions across the country, several subtle shifts began to emerge in the second and third quarters. Notably, non-interest income, which was initially negatively impacted as members pulled back on spending, rebounded. Contributing to the improvement was an uptick in member spending, the expiration of fee waivers and relief programs, and healthy margins from gains on secondary market mortgage sales.

The bottom line: Although ROA dropped 32 basis points annually in the third quarter of 2020, the national average increased 5 basis points from March to June and an additional 9 basis points from June to September.

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Key Points

• Total revenue for the credit unions industry increased 2.2% year-over-year to $41.1 billion through the first six months of the year.
• Interest income increased 1.4% year-over-year to $30.8 billion through the first six months of 2020. Non-interest income increased 5.2% annually to $10.9 billion, largely from 121.1%growth in year-to-date mortgage sales to the secondary market.
• Operating expenses increased 6.9% annually to $25.5 billion year-to-date. This is the highest expenditure through June 30 on record.
• Despite decreasing 57 basis points in the past year, the industry’s capital ratio remains relatively high at 11.2%.

NET INTEREST MARGIN VS. OPEX

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

Callahan & Associates | CreditUnions.com

The net interest margin decreased 30 basis points over the year to 2.89%. This is the largest annual decrease since the first quarter of 2003.

YTD REVENUE AND ANNUAL GROWTH

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

Callahan & Associates | CreditUnions.com

Fee income decreased 9.7% annually to $4.0 billion as of June 30. This is the least income generated from fees through the first half of the year since 2016.

RETURN ON ASSETS

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.20

Callahan & Associates | CreditUnions.com

ROA is down 40 basis points year-over-year and up 5 basis points from last quarter.

The Bottom Line

The economy closed for a large part of the second quarter, and the Federal Reserve kept interest rates at all-time lows. Consequently, financial institutions had to develop creative strategies to generate revenue. Income growth slowed in the second quarterwhile operating expenses increased. As such, ROA remained low despite increasing 5 basis points from the first quarter. Part of the expense increase can be attributed to credit unions allocating more into provision accounts. Nationwide, provisionfor loan loss increased 51.4% to $4.9 billion as the industry prepares to fight the economic onslaught of COVID-19.

This article appeared originally in Credit Union Strategy & Performance.

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