Loan Originations Rise To New Heights

Credit unions fought back growing competition to post strong first quarter performance.


The year 2012 saw a record number of new member-owners and an all-time high in lending activity. In Callahan’s Annual “Beige Book” survey some leaders expressed skepticism that they could replicate such performance in 2013. But they did! 2013’s first quarter results are in and they outpaced 2012’s performance in originations, balance sheet growth and bottom line earnings. These results come as banks and captive finance companies make a bigger play for consumer’s hearts, minds and wallets.

Loan Originations Soar

As consumer spending picks up, credit unions are lending at a record pace. Loan originations through the first three months of 2013 totaled $82.7 billion, a 14.1% increase from the previous record set last year. Lending activity is up across the board with new first quarter highs in consumer, first mortgage and member business loan originations.

Consumer lending, including auto loans and credit cards, accounts for over half of all originations. Originations in this category are up 10.9% over the past year to $43.5 billion. New car buying activity by members is certainly a factor in this increase. New car sales are on the rise in 2013, with manufacturers posting monthly sales results not seen since prior to the Great Recession. Credit unions captured 14.3% of U.S. auto financing activity in the first quarter, slightly below the 14.6% captured in 2012 but the increased volume of car sales is resulting in higher loan volume.

© Callahan & Associates |


Generated by Callahan & Associates' Peer-to-Peer Analytics.

First mortgage lending is accelerating at an even faster pace in 2013, up 19.3% versus the first quarter of 2012 to reach $31.2 billion. Mortgage rates remained near all-time lows during the quarter, spurring on additional refinancing activity by members. Although credit union call report data does not break out refinancing and purchase mortgage activity, the Mortgage Bankers Association reports that 74% of mortgage originations in the first quarter were refis. Credit unions are attracting refinance activity with creative loan options such as CitizensFirst Credit Union’s ($382M, Oshkosh, WI) “create your own mortgage” program that allows members to select a fixed rate mortgage with anywhere from a five- to twelve-year term. The product is targeted to members that are looking to enter retirement without any mortgage debt.

While refinancing activity remains strong, some credit unions are also using the low rate environment to attract first-time homebuyers. Home prices are rising but remain below pre-recession levels in many areas, providing another reason for first-time buyers to get into the market. Navy FCU ($54.2B, Merrifield, VA) is offering a HomeBuyers Choice Mortgage that provides 100% financing with no down payment or private mortgage insurance requirement in a fixed rate loan. State Employees Credit Union ($26.5B, Raleigh, NC) has been offering a similar first-time homebuyer program for 25 years with 2-year and 5-year adjustable rate options. The program recently surpassed $1 billion in originations since its inception.

Member business loan originations rose at the fastest pace compared to the first quarter of 2012, up 21.6% to $4.0 billion in the first three months of 2013. As many banks raise their minimum amounts on business loans, credit unions are finding opportunities to lend to small businesses that need capital but fall outside of the parameters set by larger institutions.

Portfolio Expands In All Areas

The first quarter of the year is typically a slow period for loan balance growth as members pay down borrowings after the holiday season. However, the record loan volume during the quarter resulted in a $2.1 billion increase in loan balances for the first three months of 2013. Although this represents only modest growth in the $607.3 billion portfolio, the dollar increase was the highest for the first quarter since 2008 – another indication that members’ financial situations are returning to normal.

© Callahan & Associates |


Generated by Callahan & Associates' Peer-to-Peer Analytics.

Loan balances have increased $27.9 billion, or 4.8%, over the past year – more than double the 2.1% pace reported last March. All loan categories posted a faster growth rate over the past 12 months than were recorded a year ago. Auto loans posted the highest growth rate, up 9.1% over the past year. New auto loan balances rose 10.6%, a significant turnaround from the 4.0% annual decline reported in this category in the first quarter of 2012. Used auto loan balances are up 8.2%, driven in part by credit unions’ continued efforts to lower members’ monthly payments by refinancing auto loans initially financed with other lenders. Auto loans account for 30% of the total loan portfolio as of March.

© Callahan & Associates |


Generated by Callahan & Associates' Peer-to-Peer Analytics.

Real estate loan balances are up 2.0% since March 2012, led by first mortgages. First mortgage balances are up 5.2% over the past year and account for the largest portion of the industry’s loan portfolio at 42%. The growth of first mortgage balances is limited due to record secondary market sales. Credit unions sold $18.1 billion of first mortgages to the secondary market in the first quarter, a new high for the quarter that represents over 58% of originations during the period. Fixed rate first mortgages account for 14.5% of total industry assets as of March, unchanged from a year ago as credit unions maintain a focus on asset liability management.

The rise in first mortgage balances offsets a 7.5% decline in other real estate loans. This category, primarily home equity loans, is affected by these loans often being included in first mortgage refinancings. However, credit unions are beginning to see more home equity lending activity as home values rise. Other real estate loan originations rose 5.3% from the first quarter of 2012 to $4.0 billion.

Credit card balances are continuing their steady rise, up 6.8% over the past year to March, up 8.9% in the past 12 months.

Margin Squeeze

Total revenue declined 1.2% from the first quarter of 2012 as both loan and investment interest income declined despite larger portfolios. The annualized average loan yield is 5.16% as of March, a 44 basis point drop over the past year. Though lower, the loan yield is more than 4.8 times the average investment yield, underscoring the importance of converting shares into loans in the current interest rate environment.

© Callahan & Associates |


Generated by Callahan & Associates' Peer-to-Peer Analytics.

Interest expense is also declining as a result of the interest rate environment with the cost of funds falling 19 basis points to 0.68%. The decline is not enough to prevent continued tightening of the net interest margin. The margin is 21 basis points lower than it was as of March 2012, reaching 2.77%. This is the lowest net interest margin on record for the industry.

Asset re-pricing was only partially offset by a 9.5% increase in non-interest income. Fee income is up 4.3% over the past year while other operating income has risen 15.5%. The latter category is seeing a lift due in part to the income generated from record sales of first mortgages to the secondary market. Other operating income also includes interchange income from debit cards, and many credit unions are experiencing higher debit card volume as more checking accounts are opened by members. The higher volume is helping to offset reductions in interchange fees related to the Durbin Amendment.

Operating expenses have risen 5.6% versus a year ago, driven largely by a 5.5% increase in salaries and benefits. Credit union employment hit an all-time high in the first quarter with nearly 249,000 full-time equivalent employees. Other expenses are being managed, with only loan servicing expenses rising at a double-digit pace – a result of the increased lending activity. Operating expenses as a percentage of average assets is steady at 3.04%.

Asset quality is continuing to improve, with the delinquency and net charge-off rates falling to 102 basis points and 61 basis points, respectively. This is leading to a lower provision for loan loss expense. The $698K quarterly provision expense is the lowest for the industry since 2007. As a percentage of average assets, the provision expense is 27 basis points, less than a quarter of its 1.12% peak recorded in the fourth quarter of 2009.

The Bottom Line

The combination of higher non-interest income and a lower provision expense is helping to offset the tighter net interest margin across credit unions, and net income is up 5.2% versus the first quarter of 2012. The $2.2 billion in quarterly earnings is equivalent to an 86 basis point return on average assets. Excluding accruals for NCUA assessments, ROA matches the March 2012 pre-assessment ROA of 83 basis points.

© Callahan & Associates |


Generated by Callahan & Associates' Peer-to-Peer Analytics.

Higher net income is pushing the net worth ratio higher. The 10.3% net worth ratio as of March is the highest for the industry since 2008. When including the allowance for loan losses, total capital is $117.9 billion or 11.0% of assets. This is also the highest total capital ratio in five years.

For a full account of the industry’s performance, view Callahan’s 1Q 2013 Trendwatch webinar, available on demand.