Consumers turned to credit unions during the Great Recession of 2009 when they were looking for a safe haven for their finances. The flight to safety drove double-digit deposit growth while credit unions’ consistent focus on lending, coupled with the retreat of competitors from the market, led to record loan originations. In 2010, credit unions’ national share of the first mortgage market surpassed 5%. In 2011, Bank Transfer Day brought a rush of new members in the fourth quarter.
Now, performance results from 2012 clearly demonstrate such successes were just the beginning.
Membership growth accelerated in 2012, building off the momentum created the year before by Bank Transfer Day. Mortgage market share reached 7%, which is more than double the level recorded five years ago. The year’s lending activity shattered 2009’s record by more than $58 billion. And core deposits fueled share growth as members opened nearly 951,000 more checking accounts than in 2011.
These records are more than a one-time spike in activity; they are a part of an ongoing rise in credit union performance. Thirty years ago, deregulation helped the industry achieve double-digit growth for a number of years. The resurgence of credit unions in today’s market shows that, as 2013 begins, credit unions are in a new era of prosperity that is driven by two converging trends: renewed consumer power and a new awareness of credit union value.
What is striking about credit union performance in 2012 is that breakthroughs are occurring in savings as well as in lending. Interest rates are at historic lows, and there is often little difference between the rates of credit unions and those of competitors. As such, it is not rate shoppers who are driving credit union growth; rather it is consumers who are looking for a financial institution that puts their needs first. Consumers are looking for a financial partner they can trust, one that is willing to work with them. Credit unions fit that bill.
Credit unions did not simply generate more transactions in 2012. They built deeper relationships with members. In 2013, expect new records as the resurgence continues and credit unions increasingly become the go-to choice for consumers.
Record Lending Activity Leads The Way
Credit unions originated $330 billion.
First mortgages accounted for 38% of the lending volume.
The credit union system passed a series of milestones in 2012: Assets surpassed $1 trillion, the loan portfolio topped $600 billion, and membership grew to more than 95 million. But perhaps the most impressive achievement is the $330.6 billion in loans credit unions originated. That’s a 21.6% increase over the $271.9 billion record credit unions set in 2009. To generate that kind of volume, credit unions had to grant more than $1 billion in credit every business day.
Such impressive activity created a tremendous opportunity for members. Some members turned to their credit union to refinance mortgage, car, or credit card debt held at another institution. Doing so often helped them save hundreds of dollars a month in required payments — a difference that helped some members stay in their homes — and much more in interest over the life of the loan. Other members turned to their credit union for help purchasing a newer car at a low interest rate.
For the past five years, Educators Credit Union ($1.4B, Racine, WI) has helped its members save via its Fast Lane Financing program. In 2012, this program saved members more than $37 million in interest from what they would have paid under their existing loan terms. This record amount of savings is in addition to the $33 million Educators’ staff saved members over the previous four years.
GTE Financial ($1.5B, Tampa, FL) closed more than 1,800 HARP loans in 2012, helping members affected by Florida’s housing downturn keep their home. Pentagon ($15.5B, Alexandria, VA) has partnered with Enterprise to offer car-buying services and an auto loan rate of 0.74% for 48 months. That translates to a monthly payment of less than $320 on a $15,000 loan.
These credit union examples highlight the range of loan programs credit unions offer members, and the balanced origination volume across all lending categories reflects this diversity. Consumer loans, including auto, credit cards, and signature loans, accounted for slightly more than half of the year’s volume. First mortgage lending was 38% of the volume while home equity and member business lending each comprised approximately 5% of the total.
Members are responding to the value credit unions deliver. Every state posted an increase in loan originations in 2012, and the industry increased loan originations 25.1% in 2012 versus 2011. The jump in volume reflects an improving national economy as well as credit unions’ effectiveness in communicating their value and willingness to lend.
Consumer Lending Drives Pickup In Loans Outstanding
Loans outstanding reached $605.3 billion at year-end.
New auto loans grew 8.6%.
The increase in originations translated to balance sheet growth across the portfolio in 2012. Loans outstanding rose $26.3 billion, or 4.5%, to reach $605.3 billion at year-end. The growth rate of nearly every major loan category accelerated in 2012 versus a year ago. Consumer loans posted the most growth while other real estate loans — which is largely composed of home equity loans, many of which were wrapped into first mortgage refinancings — proved to be the sole exception.
The new auto loan portfolio posted the biggest swing in 2012. After five straight years of declines in balances, the new auto portfolio reversed course and posted an 8.6% growth rate in 2012 versus a 7.4% decline in 2011. This shift mimics the rebound of the new car market. In 2009, the new auto market bottomed out at 10.4 million vehicles sold. Since then, the market has expanded at a double-digit pace for three straight years, reaching 14.5 million vehicles sold in 2012. Analysts expect the growth streak to continue in 2013, projecting sales of 15 to 16 million units.
The refinancing of loans held with competitors helped credit unions post a 7.9% growth in the used auto loan portfolio. All in all, credit unions captured 15.2% of the auto financing market in 2012. That’s up from 14.6% in 2011. The credit union auto loan portfolio topped $180 billion at year-end and accounted for 30% of the industry’s total loans.
The credit card portfolio reached a new high of $40 billion at year-end 2012. The 6.1% annual growth rate is the highest since 2009 and marks the tenth consecutive year of rising card balances at credit unions. This consistent growth runs counter to the trend at FDIC-insured institutions, which cut more than $1 trillion in credit card lines during the Great Recession.
Credit unions increased outstanding loan balances while improving the quality of the loan portfolio. The delinquency rate fell to 1.16% as of December 31. That’s a 45-basis-point improvement from year-end 2011. Similarly, the net charge-off rate fell to 0.74%, an 18-basis-point improvement from one year ago.
A rebounding economy is one factor that contributed to credit unions’ improved delinquency rate in 2012. Another factor is NCUA’s decision to fall in line with other regulators and allow credit unions to account for modified loans according to Generally Accepted Accounting Principles (GAAP). NCUA previously required credit unions to report modified loans as delinquent until the member made six consecutive monthly payments on time. As a result, credit unions — who held more than $8.8 billion in modified consumer real estate loans outstanding at year-end — overstated delinquency in prior periods.
New Highs In Mortgage Lending
Credit unions originated $124.1 billion in first mortgages.
Credit unions captured 7% of the national mortgage market share.
Credit unions originated $124.billion in first mortgages in 2012 — a new high for the industry — and captured a record 7% share of the national market. The volume is a 50% increase over 2011 and more than $29 billion higher than the previous record set in 2009.
The results come as the housing market rebounds. The Case-Shiller Home Price index reported a 7.3% rise in 2012 with 19 of the 20 metropolitan statistical areas (MSAs) surveyed reporting gains versus 2011. Phoenix posted the biggest gain among MSAs and reported its eighth consecutive month of double-digit increases, ending the year with a 23% rise.
Gains in home prices contributed to a drop in loan-to-value ratios, which allowed credit unions to refinance members into conventional loans. According to the Mortgage Bankers Association, 71% of mortgage lending activity in 2012 was refinancing. The group expects refinancing to account for 58% of the market in 2013.
Although refinancing remains a significant component of credit union mortgage lending activity, the purchase market is returning in a number of areas. The National Association of Realtors’ Housing Affordability Index reached a new high in 2012. Many consumers — particularly first-time homebuyers — are taking advantage of low interest rates and stable-to-rising home prices, which gives credit unions a way to strengthen relationships with younger members. Many credit unions are reaching out to and educating realtors as part of their strategy to connect with homebuyers.
On the balance sheet, first mortgages outstanding rose 5.9% during the year and accounted for 41% of the industry’s loan portfolio at year-end. Asset liability and interest rate risk were key considerations for management teams in 2012. As such, the industry managed the growth by selling $66 billion, or 53.6%, of originations to the secondary market during the year.
Home equity lending showed some improvement during the year as other real estate loan originations rose 2.9% to $17.6 billion. However, paydowns and refinancing activity resulted in an 8.1% decline in balances during 2012.
MBL Reaches New High
Credit unions originated $14.7 billion member business loans in 2012, an increase of 20.3% over 2011 activity. The volume is a new high for credit unions, indicating a continued demand for credit by small businesses.
Business lending remains a small proportion of the credit union loan portfolio, with the $36.8 billion in balances accounting for 6.1% of total loans outstanding. However, balances increased at the fastest pace of any loan category in 2012, up 8.8% year-over-year.
Although lawmakers from both parties continue to introduce and support bills that would increase the credit union member business lending cap of 12.25% of assets, the level of support has not been enough to pass legislation. In August, NCUA announced an opt in process for low-income designation, which expanded by more than 1,000 the number of credit unions that are able to gain a waiver on the cap. In addition, credit unions have turned to their own small business members to relate the critical support credit unions have provided in communities across the country.
Core Deposits Lift Share Balances
Credit unions opened 2.8 million checking accounts.
Core deposits accounted for 68.5% of total shares.
Credit union members added $51.1 billion in net new share balances in 2012, the highest annual increase since the $71.9 billion added in 2009. Growth for 2012 was 24.0% faster than growth in 2011, and the 6.1% year-over-year increase brought share balances to $889.6 billion as of December. However, it’s the dynamics of the growth that provide the most significant take-away.
The two fastest growing deposit categories during the year were regular shares and share drafts, which rose 11.8% and 10.6%, respectively. This is the second year in a row these two categories set the pace of deposit growth, meaning the two lowest-priced accounts are attracting the most deposit dollars. It underscores that members aren’t coming to credit unions for the rates; they’re coming for the relationship.
New checking accounts are often the foundation for a primary financial institution relationship, and credit unions opened a record 2.8 million in 2012. This is the fifth consecutive year the growth rate in the number of checking accounts has accelerated. The new checking account total exceeds the number of members who joined in 2012, indicating credit unions are developing relationships with existing members as well as new ones.
Money market share balances rose 7.5% to reach nearly $206 billion. Combined with the regular share and share draft balances, these core deposits accounted for 68.5% of total shares at year-end. These balances provide a source of stable funding for loans as well as a low cost for credit unions.
IRA and Keogh balances rose 1.8% during 2012 while share certificate balances declined 3.1% as the rate environment prompted members to leave funds in liquid accounts.
Investment Portfolio Expands
Investments reached $386.3 billion
Credit unions held $102.7 billion in cash and equivalents.
Share balances are increasing at a faster rate than loans; as such, the credit union investment portfolio is likewise expanding. Investment balances rose 8.3% during 2012 to reach $386.3 billion.
Federal agency and government securities were credit unions’ dominant investment option, accounting for 51.9% of the portfolio. Investments in banks and savings & loans, primarily jumbo certificates of deposit, was the second largest category with $48.1 billion in balances.
Balances at corporate credit unions declined 22.3% during the year to $29.7 billion. The bulk of corporate balances are in short-term, cash-like options with only $4 billion of the total in longer-term options. Corporates, with their evolving business model, held just 7.7% of credit union balances at year-end.
Credit union investment maturities extended slightly during the year. Investments maturing in more than one year accounted for 54.2% of the portfolio versus 53.9% as of December 2011. However, credit unions remained highly liquid with $102.7 billion in cash and equivalents.
Highest ROA Since 2005
Non-interest income increased 16.7%.
The ratio of operating expenses to average assets improved nine basis points.
Total income rose slightly at credit unions in 2012 even as interest rates remained at historic lows. Loan interest income fell 3.2% despite portfolio growth and investment income dropped 12.3%. The low interest rate environment squeezed the industry’s net interest margin, which dropped 21 basis points in 2012 to 2.94%. This is the first year on record below 3.0%.
A 16.7% increase in non-interest income — led by income from sales of first mortgages to the secondary market — offset the decline in interest income. Non-interest income as a percent of average assets rose 14 basis points during the year to 1.44%. Fee income accounted for only one basis point of the increase; the remainder came from other operating income, including mortgage sale gains.
In addition to improving non-interest income, credit unions managed operating expenses. The ratio of operating expenses to average assets improved nine basis points to 3.19%, though part of the improvement was the result of lower NCUA assessments. The provision for loan loss expense returned to normal levels in 2012 and dropped 14 basis points from 2011 to reach 36 basis points.
Return on assets reached 86 basis points for the year, up 18 basis points from a year ago and equal to the ROA posted in 2005 — the last year it reached that level. Excluding the corporate credit union assessment, ROA was 94 basis points, which would have been the highest since 2003.
The improved earnings resulted in capital reaching $116.3 billion. Total capital including the allowance for loan losses as a percentage of assets was 11.2% at year-end. The net worth ratio improved 20 basis points to 10.4%, the highest since 2008.
Although earnings showed strong improvement, many credit unions are concerned about the sustainability given the interest rate environment. Low rates have increased the emphasis on lending, which remains the best way to improve both net interest margin and net income. Credit union management teams are looking for new sources of revenue from service offerings and CUSOs. Efficiency remains a priority at many shops. The combination of efforts will be important to future success.
Continuing The Resurgence In 2013
The challenge for credit unions will be to continue to evolve their business models in ways that demonstrate and deliver the cooperative difference. In an environment of historically low interest rates, consumers are turning to credit unions for the values they represent as much as for the value they provide. The average member relationship, including both loan and share balances, has increased more than 17% in the past five years to reach $15,392. To ensure they don’t lose sight of what led to this success, credit unions must keep a constant focus on member needs. There are headwinds to face. The regulatory environment has added new requirements to day-to-day business. The competitive environment is intensifying and interest rates are expected to remain low for the foreseeable future. Demands for investments in new technologies and service capabilities are growing. The economy is picking up but uncertainties remain with the budget sequestration now a reality.
These types of challenges often spur credit unions to be at their creative best and develop collaborative industry solutions that enhance their competitive profile. Such approaches remain a strategic advantage for the industry and another benefit of the cooperative approach to doing business — a benefit that is increasingly recognized in the market.