Credit unions are posting outstanding results in 2012. Membership has increased for six consecutive quarters. Core deposits are rising and now account for two-thirds of total share balances. Lending activity is at a record pace through midyear. Asset quality is returning to levels closer to historical norms as the economy gets back on track. Earnings are the highest in seven years.
This performance is the result of credit union success in building member relationships. Consumers are responding to the cooperative values of credit unions, their focus on service, and their ties to and knowledge of their community — whether defined by geography or sponsor group. Cooperative values often translate to value for consumers through better rates and fees. But for many credit unions, their cooperative values go beyond price.
The United Nations has declared 2012 the International Year of Cooperatives, and the cooperative principles are resonating with consumers today perhaps more than ever. Even consumers that are not explicitly aware of the principles notice that the notions of equitable contributions by participating members, emphasis on education, and concern for community are a part of credit unions' DNA but are often absent in competitors. In an environment in which consumers are looking for a better way, credit unions are standing apart.
As the credit union reach extends to more than 94 million Americans, the core values embodied in the cooperative principles must continue to play an important role in the industry's future. Credit unions, whose asset base now tops $1 trillion, are increasingly in the media, community, and political spotlight. It is not the size that validates the industry's success, however, it's the measurable impact they are making in each member's life. That impact is what keeps members coming back to their credit union … and bringing others with them.
Membership Gains Lead To Accelerated Growth In Key Measures
More than 1.3 million net new members joined a credit union in the first six months of 2012
The average member relationship was up $434 over the past year
Credit unions' key annual growth rates picked up versus mid-2011 results. Loan balances, share balances, and membership each grew at a faster rate than one year ago. Loan and share growth rates both exceeded the growth rates posted by FDIC-insured institutions over the past year. The increase is driven by a 2.3% membership growth rate that is almost four times the 0.6% rate posted at June 2011. It's also the highest 12-month growth rate at midyear since 2001.
More than 1.3 million net new members joined a credit union in the first six months of 2012. What's more, credit unions have posted an increase in membership of at least 230,000 each quarter for six consecutive quarters. Bank Transfer Day in November helped credit unions add more than 400,000 new members during fourth quarter 2011, but it is now clear those gains were not a one-time boost. After adding more than 700,000 members in the first quarter of this year, credit unions added another 600,000 in the second quarter. The second quarter increase is more than double the number of members added in the second quarter of 2011.
These new members are not just opening a regular share account to get an auto loan, though. They are bringing their financial relationship to the credit union. The number of checking accounts in the past 12 months grew 6.3%, nearly three times the new member growth rate. The average member relationship, including both loan and share balances, was $15,201 as of June 30. That is up $434 over the past year — an outstanding result given the time it typically takes to develop new member relationships.
The key question for credit unions is: “Why now?” Is it a response to competitor missteps? Is it the lower rates and fees credit unions generally offer, especially now with free checking going by the wayside at many banks? Is it the local ties credit unions have with their communities and sponsor groups, which larger competitors have lost? Is it the cooperative idea that each member matters, which is often reflected in credit union service? Is it the increased marketing and media coverage, which is leading consumers to investigate credit union options, in many cases for the first time?
The answer, likely, is a combination of these factors. Consumers are recognizing the value of credit unions as an alternative to traditional banking institutions. Each credit union needs to connect with new members to better understand why they are joining and moving their financial relationships. The answers will give credit unions an indication of how they can build on this positive growth trajectory.
Fastest Loan Growth Since 2009
New auto loan balances were up nearly 1%, reversing an 18-month trend
The annual growth rate in the credit card portfolio more than doubled to 4.7%
Outstanding loan balances at credit unions topped $589 billion as of June 30, growing 3.1% over the past year. After declines in balances during 2010 and 2011, balance sheet loan growth is picking up momentum in 2012.
The growth momentum is not concentrated in a single product; it is across the loan portfolio. First mortgage, auto, credit card, and member business loan balances all increased at a faster rate over the past 12 months than at midyear 2011. Other real estate loans was the only category that posted a decline, which could be the result of members refinancing and consolidating home equity lines into their first mortgage loan.
The biggest turnaround in lending results is in new auto loans. In June 2011, new auto loan balances continued their 18-consecutive-quarter decline, dropping more than 12% from the previous June. That trend ended in the second quarter of this year. At midyear 2012, new auto loan balances increased nearly 1%. Although the gain is modest, it is significant given the importance of auto lending for credit unions.
Auto lending remains a core product for much of the industry, and used car loan balances were up 7.1% over the past year. Many credit unions are growing balances by refinancing competitor's loans at lower rates. This helps reduce monthly payments and often saves members significant amounts of interest payments. Given the low interest rate environment, some credit unions are differentiating their loan products by more than basis points. Neighborhood Credit Union ($313.6M, Dallas, TX) offers an auto loan that combines a competitive rate with complimentary vehicle protection for the first three to six months. Approximately half of its members with this loan extend the protection program beyond the complimentary period, generating additional revenue for the credit union. Through this bundled value package, Neighborhood pushes members to think beyond the interest rate.
Credit cards are another area where growth picked up. The credit card portfolio's annual growth rate, 4.7%, more than doubled over the past year. Credit card balances have risen at credit unions as other lenders have pulled back. Credit unions have posted annual increases in card balances for at least 10 consecutive years and held more than $37 billion in balances as of June.
More credit unions are looking to their credit card rewards programs to reinforce community or sponsor group ties. Michigan First ($623.3M, Lathrup Village, MI) launched a card that gives 1.5 points for every purchase made in Michigan and one point for purchases made elsewhere. The cards depict scenes from across the state and members have the option of donating points to Michigan charities. Credit unions in Colorado and Oregon also offer local rewards programs as another way to creatively differentiate beyond interest rates.
In addition to auto and credit card, member business and student lending also increased. Member business loan balances were up 8.3% since June 2011, making this the fastest growing loan category. Student lending posted strong growth, rising 53% over the past year. This is a new product line for many credit unions that programs such as Credit Union Student Choice have made more accessible. Although it represents a small portion of the total portfolio, student loan balances reached $1.7 billion at midyear.
Record Consumer And Mortgage Loan Originations
Credit unions funded $85.5 billion in consumer loans through June
Credit unions originated $56.3 billion in first mortgages in the first half of 2012
Credit unions originated $157 billion in loans in the first six months of 2012. That's 29% higher than the first half of 2011 and 9% higher than the previous midyear high recorded in 2009. All loan categories — consumer, first mortgage, other real estate, and member business — are producing higher volume this year versus a year ago.
The difference between this year versus last year and 2009 is in consumer lending. Credit unions funded $85.5 billion in consumer loans through June, well above the $73 billion funded last year and $72 billion funded in 2009. As noted, auto and credit card lending both posted strong balance sheet growth. However, the growth in outstanding loans understates the 17% increase in production versus a year ago, which is partly the result of members refinancing car and credit card loan balances.
First mortgage loan balances were up 5.7% over the past year, but that number understates the 66% increase in first mortgages credit unions originated through the first half of the year. The $56.3 billion credit unions originated in first mortgages was slightly more than the $55 billion originated in the first half of 2009, during the refinance boom, and well ahead of the $34 billion originated a year ago. Credit unions captured 7.6% of all first mortgage activity nationally through the first half of the year, although that figure doesn't reflect some CUSO mortgage lending activity that is not reported on credit union call reports. Even with that missing volume, credit unions are the third-largest mortgage lender nationally in 2012 behind Wells Fargo and JPMorgan Chase. That places the industry ahead of both Bank of America and Citibank, institutions with balance sheets that are double credit unions' $1 trillion in assets.
As first mortgage originations remain strong, so do sales of these loans to the secondary market. Credit unions sold $28.4 billion, or 50% of originations, through the first six months of the year. The secondary market activity reflects the steps credit unions are taking to manage interest rate risk by not holding long-term assets on their books at a time when rates are hovering near historic lows. Despite the record first mortgage lending activity, fixed rate firsts accounted for 14.6% of total assets as of June, little changed from the 13.3% recorded in June 2001.
Improved Asset Quality
Net charge-offs have fallen to an annualized rate of 0.76% through June
At 1.11%, Arizona's average delinquency is now below the national average
Both credit union loan delinquency and net charge-off rates declined. Delinquent loans accounted for 1.21% of loans outstanding at midyear, down 38 basis points from June 2011. Net charge-offs fell to an annualized rate of 0.76% through June as compared to the 0.95% rate one year ago.
Credit unions continue to work with financially stressed members by refinancing or modifying loan agreements to reduce monthly payments. Modified real estate loans on the books at midyear totaled $11.4 billion, including $10 billion in first mortgages.
NCUA's decision to act in accordance with other regulators and allow credit unions to account for modified loans according to Generally Accepted Accounting Principles (GAAP) is part of the reason for the improved asset quality. Previously, NCUA required credit unions to report modified loans as delinquent until the member made six consecutive, on-time monthly payments. This resulted in credit unions overstating delinquent loans. Because of the new accounting, the biggest improvements in delinquency rates are in states with the most modification activity. Arizona, Nevada, and California each posted significant declines in delinquency. The average delinquency at Arizona credit unions dropped to 1.11%, which is below the national average.
Core Deposits Push Shares Higher
Total share balances reached $880.4 billion as of June 30
Regular share balances hit $273 billion
Total share balances rose by more than $57 billion over the past 12 months, reaching $880.4 billion as of June 30. The 7.0% annual growth rate was the fastest since 2009. Continued growth in the share portfolio added to liquidity, and the loan-to-share ratio fell from 69.4% to 66.9% over the past year.
Share growth remained strong. More importantly, members directed their funds to core deposit accounts. Regular shares, share draft, and money market balances accounted for two-thirds of the credit union deposit base. These funds typically don't leave credit unions as they are not the accounts that rate shoppers use for excess cash.
Share draft balances posted the highest growth rate in the share portfolio, up 16.2% over the past year. This is an indication of consumers' interest in and willingness to move their relationships to credit unions. The checking account is an anchor for debit cards, bill pay, and direct deposit. These services not only tie a member to their credit union but are also a revenue source via interchange income from debit card usage.
Credit unions such as University of Iowa Community ($1.6B, Iowa City, IA) are using referral programs to take advantage of market interest. UICCU has moved beyond word-of-mouth referrals, allowing members to refer friends and family through email, social media such as Facebook and Twitter, and a UICCU microsite, www.ReferUICCU.org. The credit union gives both the member and the referral $50 if the referred member opens an active checking account that includes either direct deposit or bill pay.
With $273 billion in balances as of June, regular shares remained the largest component of the share portfolio. These balances were up 12.1% over the past year, even with interest rates hovering near historic lows. Money market share balances were up 7.6% over the past year and surpassed $200 billion.
IRA/Keogh balances also grew and were up 2.7% in the past 12 months. Share certificates were the only share category that posted a year-over-year decline, although the rate of decline has slowed. All share categories posted growth rates that are equal to or better than the annual rates posted in June 2011.
Low Rates Challenge Investment Portfolios
Agency and government securities balances topped $200 billion
Investments in banks and S&Ls topped $47 billion
Investment balances stood at $391.5 billion as of June, up 13.3% over the past year. Liquidity is creating challenges for credit union CFOs as the average investment yield dropped 35 basis points over the past year to 1.37%.
Investments maturing in less than one year accounted for 46% of the total portfolio. Because of the relatively flat yield curve, many CFOs do not see the value in extending their portfolio for a small increase in return. In September, the Federal Reserve announced it expects to keep rates at historic lows into 2015. In an environment where every basis point of return matters, management of the short end of the portfolio is critical.
With balances of $204 billion, agency and government securities were the largest component of the investment portfolio. These investment balances were up 15.2% over the past year, representing the fastest growing component outside of the 21.5% increase in cash and cash equivalents.
The fallout from the corporate credit union crisis is clear as investments in banks and S&Ls surpassed investments in corporate credit unions. The former category has attracted balances of $47.4 billion while corporate investments, including cash, totaled $36.2 billion, or 9.4% of the total investment portfolio.
Revenue Reflects Re-Pricing Of Balance Sheet
Non-interest income increased 14.0% versus midyear 2011
Operating expenses rose 6.0% versus the first six months of 2011
The low interest rate environment combined with the turnover of loan and investment balances resulted in a slight decline in revenue versus the first half of 2011. Loan interest income was down 3.6% despite growth in loan balances. Investment income followed a similar trend, down 10.7% even with a 13.3% growth in balances.
Interest expense declined as the cost of funds reached 0.85%; however, lower asset yield pushed the net interest margin down to 2.96%. This was a 23-basis-point fall from June 2011, which reinforces the importance of lending at a time when the average loan yield is four times the average investment yield.
Non-interest income, up 14.0% versus midyear 2011, helped offset the decline in interest income. A significant driver of the increase was the sale of first mortgages to the secondary market. These sales generate material gains for credit unions but fluctuate with mortgage lending activity. In the meantime, credit unions are looking for alternative sources of revenue, such as CUSO revenue, during a time of squeezed interest margins.
Credit unions managed operating expenses during the first half of the year. Operating expenses rose only 6.0% versus the first six months of 2011 — a slower rate than the 6.9% asset growth rate. As of June, the operating expense ratio was down one basis point versus a year ago to 3.07%.
The provision for loan loss expense decreased 23%, demonstrating one way credit unions benefitted from improved asset quality. As a percentage of assets, this expense is closer to historical norms.
Highest ROA Since 2005
Total capital hit 11.0%
Credit unions reserved more than $1.21 for every $1 of delinquent loans
Prior to accruals for the corporate credit union assessment, return on assets for the industry was at 90 basis points on an annualized basis as of June. In August, NCUA announced a 9.5-basis-point assessment for corporate credit unions, five of which credit unions had accrued through midyear. Even with the 2012 assessment, the year's earnings will be strong.
Capital levels remained strong. The net worth ratio, 10.2%, was up one basis point as of June. Total capital including the allowance for loan losses account was at 11.0%. Reserves for loan losses helped fortify the credit union balance sheet. The coverage ratio, which calculates the allowance for loan losses as a percentage of delinquent loans, was at 121.7% as of June, meaning credit unions reserved more than $1.21 for every $1 of delinquent loans.
A Moment Of Opportunity Or A New Era?
Credit unions are enjoying unprecedented momentum in the marketplace. New member growth, expanded relationships with existing members, and increased recognition for their member-focused approach is providing an incredible opportunity. The challenge for the industry will be in continuing this momentum.
This is an election year, and United States citizens are making choices. Politically, the choice might be simplified to a decision about the government's role in the country: One side calls for limited government involvement; the other views government involvement as a necessity to correct market imperfections. Credit unions occupy a middle ground. They are players in a competitive market in which they must compete every day to win business. At the same time, they are not-for-profit organizations that work for their members and have an underlying service objective in their mission.
Can credit unions demonstrate how this middle ground can be a long-term solution for many consumers? Many members already see credit unions' value in this way. Others have yet to discover it. Credit unions must leverage the momentum they have today to further propel the industry into a new era. Even with a challenging interest rate and regulatory environment, the time is right to move forward with more ambition than ever. Will credit unions seize the day?