Credit Unions Keep Lending Momentum

Consumer loan originations were up 10% in the first six months of 2011 compared to a year prior.


Credit unions at mid-year 2011 are at a strong position: lending is up, mortgage refinancing is booming, and asset quality is stronger than ever since the recession began. The country’s nearly 7,400 credit unions increased lending by 8% in the first half of 2011. This is the fourth consecutive quarterly rise in total loan originations. Such loan activity is a driving factor behind the ongoing growth of total revenue. This continued positive total revenue growth (net interest and non interest income), is unique for the credit union system compared to all other insured depository institutions.

“Credit unions’ stability and improving financial results is evident across all measures of performance,” says Chip Filson, president of Callahan & Associates, the firm responsible for reporting the credit union results. Asset quality is stronger: Both the delinquency and net charge-offs ratios have improved and the coverage ratio (loan loss allowance divided by total reportable delinquent loans) exceeds 100% for only the second time since mid-year 2007.   

Loan Activity Surges

Credit unions’ growing loan momentum is the most important trend reported by the $955 billion credit union system. Consumer loan originations increased by 10% in the first six months of 2011 compared to the first six months of 2010. First mortgage volume grew 7.3% over the same period, even though credit unions continue to sell a significant portion (45%) of their production volume to the secondary market. This selling rate is almost double the 24-28% level in the years prior to the Great Recession.

“The Federal Reserve’s August announcement of a two-year commitment to keep rates low might change the rate of secondary market activity,” Filson says. “But the rate stand-still provides credit unions a unique opportunity to expand balance sheet loans and increase margins due to the stable funding outlook for short-term deposits.

Greater volumes of mortgage refinancings have occurred since the June 30 numbers and the Fed’s announcement of rate stability. The Fed’s rate freeze will provide credit unions additional opportunities to serve their 92 million members through mortgage refinancing. These interest savings give members additional cash flow to spend locally, thus enhancing local and regional economies and leading to stronger national recovery prospects.

For example, in August Affinity Plus Credit Union ($1.4 billion, St. Paul, MN) sent an email to members highlighting the institution’s mortgage products. In the following seven business days, the credit union received more than 1,800 new applications. And loan applications at Financial Partners Credit Union ($738 million, Downey, CA) have “exploded” in volume. The credit union’s loan pipeline jumped from $7 million at July 30 to more than $35 million by mid-August.

Capital, Earnings, And Balance Sheet Liquidity All Strengthen

Total credit union capital passed $106 billion, resulting in the capital-to-assets ratio rising above 11%. Credit unions’ major challenge is converting the $345.5 billion of investments and cash into loans. This would reverse the downward trend in the loan-to-share ratio, which stands at 69.4% at midyear, down from 72.8% at mid-year 2010.

A positive indicator for future credit union loan growth is that consumer expenditures are nearing more normal, pre-recession levels. Spending as a percentage of disposable income is now nearly 92%, up almost four percentage points from the trough of the financial crisis. Additionally, the household financial obligations ratio, or the burden of debt repayments, is at the lowest point since 1994. Consumers are benefiting from refinancing outstanding debts and credit unions are taking the lead in enhancing their members’ personal balance sheets. New loan volume is averaging nearly $1 billion every business day.

Click on graph to view larger size  |  Source: Callahan & Associates Peer-to-Peer

Market Share Increases Reflect Member Value

Increasing loan volume is also increasing credit union market share. The industry’s share of the auto finance market is 15.2% at midyear; this is the highest level of the past 12 months. The 5.7% of total year-to-date mortgage originations is double the pre-crisis level and continues to increase.

Click on graph to view larger size  |  Source: Callahan & Associates Peer-to-Peer

Growing Trust In A Time Of Market Uncertainty

The political squabbling regarding the debt ceiling, Standard &Poor’s downgrade of U.S. Treasury debt, and stock market volatility has all added to consumer worries. Slower-than-expected economic growth is creating fewer jobs than necessary to notably reduce the rate of unemployment.

Even in this period of slow recovery, however, credit unions are an oasis of stability, reliability, and dependability. Credit unions have been there for members in all seasons. Their leadership in lowering loan rates and reducing debt burdens benefits members, credit unions, and local communities.

“Credit unions continue to earn members’ confidence when uncertainty clouds many other aspects of the financial and political system,” Filson says. “That is the critical cooperative difference – providing a relationship members can count on whatever the economic outlook.