Shifting Into High Gear

In the face of economic success also shared with key competitors, credit unions must ramp up efforts to differentiate themselves through member-oriented products, services, and operational investments.


The U.S. economy is gaining traction as 2013 progresses. The effects of lower federal spending due to the budget sequester have been offset by increased spending among consumers and in the private sector. Auto sales and manufacturing are roaring ahead in 2013 as new cars are selling at the fastest pace since 2007. Housing continues to gain ground with the S&P/Case-Shiller National Home Price Index up 10.1% through June compared to the prior year. Every city featured in the 20-City Index is up over 2012 levels, while Las Vegas, Los Angeles, Phoenix, and San Francisco have each posted at least 15 consecutive months of home price increases. Wall Street expects economic growth to accelerate in the second half of the year and shift into a higher gear in 2014.

The improved economy is leading the Federal Reserve to debate how long to continue some of its aggressive monetary policies, particularly the purchase of mortgage-backed bonds and U.S. Treasury bonds through its Quantitative Easing program. Expectations are that, before year’s end, the Fed could begin to reduce the amount of monthly purchases from its current $85 billion pace.


Anticipation of this “tapering” phase has caused longer-term interest rates to move up significantly in the second quarter. Yields on the 10-year Treasury jumped from 1.63% at the beginning of May to near 3.00% in August.

Although the longer end of the yield curve has steepened, short-term rates remain anchored near historical lows. There is no expectation of a rise in the Fed Funds rate any time soon, with many predicting 2016 at the earliest. Higher longer-term rates should help credit unions and other financial institutions increase their net interest margin if consumer and businesses continue to pick up their spending and borrowing. Fueled by this positive data, all indications are that the economy will burn even brighter in the months and years ahead.

A Captivating Chapter In The Credit Union Story

Second quarter results for the nation’s 6,818 credit unions also indicate the industry is gaining speed right alongside the larger national economy. Loan originations are surpassing 2012’s record pace and, for the first time since 2008, growth in the loan portfolio has surpassed share growth. Credit unions in seven states have averaged double-digit loan growth over the past year.

Growth in credit union membership remains strong, expanding by nearly 2 million individuals to reach 96.4 million total across the country. As membership grows, the credit union employment base is also rising. Credit unions now provide gainful employment to more than 251,000 Americans, with over 7,000 new positions added in just the past 12 months alone.

Credit unions gained momentum during the downturn by serving members when other institutions pulled back. Now, they must demonstrate how the cooperative approach delivers unique value to consumers in improving economies as well. 

Despite the pick up in the economy, a rise in interest rates and intense competition — with banks reporting record earnings — indicate that business as usual won’t suffice going forward. Credit unions gained momentum during the downturn by serving members when other institutions pulled back. Now, they must demonstrate how the cooperative approach delivers unique value to consumers in improving economies as well.

Credit Unions Lend $1 Billion A Day To Members

  • Loan originations ramp up by 5.4%, the highest rate of growth for the portfolio since 2008.
  • The delinquency rate falls to 1.04%, with the net charge off ratio also settling at an improved 58 basis points.

Credit unions originated $176.6 billion in loans in the first six months of 2013, a 12.4% increase over 2012’s record pace. Credit unions are seeing higher activity in every lending category and have provided members with $1 billion in loans each day throughout the first half of the year.


Consumer loans account for over half of this loan volume, with $92.6 billion in auto, credit card, and other loans originated to members. Amazing value is being provided to these borrowers, with some credit unions offering 0% auto financing, single-digit interest rates on credit cards with no annual fee, or even loan discounts to important member segments such as active military.


Record loan originations are also translating to growth on the balance sheet. The current 5.4% growth rate is the highest for the loan portfolio since 2008 and has pushed loan balances to $621.3 billion at mid-year. Growth is accelerating in all segments of the loan portfolio versus a year ago.


With the economy picking up and unemployment down, asset quality has improved. The delinquency rate has fallen 17 basis points over the past year to 1.04%. The net charge off ratio has also dropped to 58 basis points.


Auto Lending Leads Growth

  • New auto loans are up 10.7% annually, the fastest of any loan category, while used auto is up 9.2%.
  • Indirect loan balances have risen 14% over the same period, reaching $84.9 billion.

Auto loan balances at credit unions rose $16.8 billion, or 9.7%, over the past year to reach $189.5 billion. Credit unions captured 14.7% of all auto financings in the first half of 2013, down slightly from the 15% share recorded over the same period in 2012.


With car sales picking up steam nationally, new auto loans posted the fastest growth of any loan category, up 10.7% over the past year to reach $67.0 billion. The double-digit growth in these loans is a significant shift from the shrinking balances recorded two years ago. Used auto loan growth continues to be strong, up 9.2% over the past year. Credit unions have been active in refinancing members’ auto loans, thereby reducing these borrowers’ interest rates and monthly payments. With interest rates on car loans expected to remain low, there will be continued opportunities for credit unions to save members money and grow their portfolio.


Indirect lending continues to play an important role in many credit union auto lending programs. Indirect loan balances reached $84.9 billion as of June, up 14% over the past 12 months. Auto loans make up the bulk of these loan balances, though more credit unions are initiating point of sale lending programs that involve partnerships with local businesses such as doctors and home appliance retailers.

Record First Mortgage Volume

  • Credit unions generate $66.4 billion in first mortgage orginations over the first six months of 2013, equaling 6.8% of all U.S. mortgage originations during this period.
  • First mortgage loans are up 5.7% annually at mid-year, with credit unions selling a record $34.3 billion in loans to the secondary market.

In the first six months of 2013, credit unions originated the highest amount of first mortgage loans ever. The $66.4 billion in first mortgage volume represented 6.8% of all mortgages originated in the U.S. over this period, according to the Mortgage Bankers Association. In the second quarter alone, credit unions originated $34.9 billion in firsts – the highest volume ever originated by the industry in a quarter. Credit unions’ share of the national market in the second quarter was 7.1%.


This record activity comes as interest rates move higher. Although the credit union call report does not separate purchase mortgage activity from refinance activity, the Mortgage Bankers Association estimates that refinance volume accounted for 64% of first mortgage activity in the second quarter. By the second quarter of next year, that volume is expected to fall to 36% due to rising interest rates and a smaller pool of consumers who can benefit from a mortgage refinance.


Credit unions are also anecdotally reporting a shift to more purchase mortgages in their individual markets. Many have been working to develop relationships with realtors since the downturn and these relationships will begin to pay dividends as rates rise. In order to maintain the mortgage lending momentum and market share credit unions have gained since 2007, a focus on proactively developing a purchase mortgage program is paramount.


On the balance sheet, first mortgage loans grew 5.7% over the past year to reach $257.7 billion as of June. The growth is understated due to sales of loans to the secondary market. Credit unions sold a record $34.3 billion of mortgages during the first half of 2013, representing 51.7% of year-to-date originations.

As home prices rise, home equity lending is returning. Home equity loan originations rose 10.5% versus the first half of 2012, the first increase since year-end 2006. Balances are still declining 7% year-over-year, but this is due in part to home equity loans being included in first mortgage refinances.

Credit Card And Member Business Loan Balances Continue To Rise

  • Credit card balances see a 7.2% lift annually, reaching $40 billion.
  • MBL originations leapt up by 19.1% in the first half of 2013 compared to the same period a year prior.

Credit card balances reached $40 billion at mid-year, up 7.2% annually over the past year. Credit unions have posted steady growth in this product over the past 10 years as consumers look for competitive rates and straightforward programs. Credit unions are also building card program relationships with universities that previously turned to national banks. Their local, long-term focus positions them as an ideal fit for schools and their alumni.


Member business lending is also benefitting from credit unions’ local focus. As larger competitors scale back from on smaller markets, credit unions are realizing new opportunities to build relationships with local businesses. Member business loan originations have grown by 19.1% versus the first six months of 2012 to reach $8.1 billion. Balances are up 10.4% from last June to top $38.6 billion.


Core Accounts Drive Share Growth

  • Members opened 2.6 million new checking accounts last year, increasing checking account penetration for the industry to 52%.
  • Credit unions enhanced their average member relationship by $15,611, or 5.7%, year-over-year.

As loan growth picks up, deposit growth is slowing. Members added $41.1 billion in share balances over the past year, a 4.7% growth rate. This is down from the prior year’s 7% rate with each deposit category posting slower growth than reported a year ago. Share balances declined by $600 million between the first and second quarter, indicating members may be shifting funds to other options like the stock market.

State National CUNA Mutal Group

Although share growth is slower, the growth of core deposit account balances remains strong. Regular share balances are up 9.7% over the past year to top $312 billion. Regular shares are the largest segment of the share portfolio, accounting for 34% of all deposits. Money market balances are up 5.5% since last June to reach $211.5 billion, the second largest segment of the share portfolio.

Share draft balances rose 8.6% over the past year as members opened over 2.6 million new checking accounts. Over 52% of members hold a checking account at their credit union as of June. This is up from less than 46% just five years ago, with checking account growth even exceeding the strong member growth experienced during this timeframe. As a key indicator of a member’s primary financial institution, the number of checking accounts is a crucial metric for many credit unions to monitor.

Longer-term savings options are seeing little activity given the low interest rate environment. IRA/Keogh balances are up slightly from last June. Certificate balances are the only category to decline over the past 12 months — these are down 3.6% annually as members remain hesitant to lock up funds.

Although share growth is slowing, the average share balance continues to rise. Each member holds an average of $9,564 in savings at their credit union as of mid-year. When combined with loan balances, the average member relationship is up 5.7% annually, reaching $15,611 as of June 2013.

Interest Rate Movements Effect Investment Strategies

  • The investment portfolio notches up by a conservative 2.8% annually, compared to 13.3% growth the year before.
  • Agency investments accounts for 50.9% of total investments among credit unions.

With loan growth exceeding share growth, credit union investment balances declined by $14.2 billion in the second quarter to $402.4 billion. Over the past 12 months the investment portfolio grew by 2.8%, well below the 13.3% pace recorded in June 2012.


Agency securities are currently the dominant investment vehicle for credit unions. The $204.7 billion in Agency investments accounts for 50.9% of total investments among the industry. Investments in banks and savings & loans, which primarily consist of jumbo certificates of deposit, reached $48.6 billion at mid-year. Corporate credit union investments, including overnight deposits, are down 22.6% over the past year to $28 billion. Mutual fund investment balances are up 14.9% over the past year but remain a small component of the portfolio at $2.3 billion.

Lastly, credit unions have extended investment maturities over the past year. Investments maturing in more than one year now account for 57.2% of total balances, up from 54.8% last year. However, credit unions remain highly liquid, with nearly 25% of balances in cash or cash equivalents.

With interest rates on the longer end of the curve rising in the second quarter, credit unions need to ensure they are evaluating their investment portfolio in conjunction with their asset liability management (ALM) process. Credit unions’ FASB 115 valuation reserve for sale securities fell from a $230 million unrealized loss at the end of the first quarter to a $2.8 billion unrealized loss at the end of the second quarter, an indication of the effects rising rates can have on the investment portfolio. The interest rate shift also extended the durations of callables and mortgage-backed securities during the quarter.

It is likely that short-term rates will remain near current levels for at least the next 18 months. However, credit unions need to review their ALM assumptions and adjust their portfolio as needed. This could mean reinvesting in shorter-term instruments or repositioning certain securities in the portfolio.

If the Fed is able to meet its objectives, there is time for credit unions to adjust their balance sheets in anticipation of an upward yield curve shift, but that process must begin now.

Earnings Steady As Credit Unions Invest In People, Financial Education, And Messaging

  • Net income receives a 4.8% lift in the first half of 2013 versus the year prior. Non-interest income grows by 8.4% annually.
  • Operating expenses increase 5.4% annually, driven by a 6% increase in salaries and benefits and a 6% growth in marketing spend.

Total revenue is down slightly versus the first six months of 2012 as interest income has fallen despite loan portfolio growth. The industry’s current $25 billion in revenue is down 0.9% versus a year ago as interest income has declined 4.3% due to asset re-pricing. The good news is that the net interest margin held steady at 2.77% between the first and second quarters.

Non-interest income is currently up 8.4%, led by an increase in other operating income. This category includes interchange income and gains on sales of mortgages, which have been a material component of many credit unions’ revenue streams over the past few years. With rates rising, it is likely that income from mortgage sales will begin to slow. In addition, there is uncertainty around interchange rates, especially given a recent court victory by retailers that could require to lower transaction rates than those enacted under the Durbin amendment.

Fee income is up 3.2% over the past year but is declining as a percentage of assets. It now stands at 70 basis points in the first half of 2013, versus 72 basis points over the same period in 2012.

Operating expenses have increased 5.4%, primarily due to a 6.0% increase in salaries and benefits as credit unions add to their employee base. Marketing expenses are up 6.0% as well as credit unions invest in and plan for growth. As a percentage of average assets, operating expenses prior to NCUA assessments have held steady over the past year at 3.07%. Credit unions have held the ratio within one basis point of this level for four consecutive years.

Despite better than projected performance of corporate credit union investments taken under conservatorship, NCUA has also announced an 8 basis point assessment which is due in the third quarter. Credit unions accrued 3 basis points in assessment expenses throughout the first half of 2013.

The provision for loan loss expense continues to fall as asset quality improves at credit unions. The $1.3 billion expense is the lowest for the first six months of the year since 2007 and accounts for 26 basis points of average assets, well below the 1.10% recorded four years ago.

Net income is up 4.8% versus the first half of 2012, and return on assets is steady versus a year ago at 0.85%. Prior to accruals for the NCUA assessment, ROA is at 88 basis points through June 2013.

Total capital at credit unions is up 4.3% over the past year to $117.2 billion or 11% of assets. The net worth ratio is up 32 basis points over the period to reach 10.5% at mid-year.

Sustaining The Commitment

The second quarter may have marked a turning point for the cooperative industry. But the economy’s improvement has also helped credit union competitors get back on their feet. The FDIC has reported the sixteenth consecutive quarter of rising earnings for banks in the second quarter as well as the highest quarterly earnings on record. Auto and credit card loans are growing on bank balance sheets as asset quality improves.

Just as important as making new investments for growth is sustaining the commitment to members that credit unions demonstrated during the downturn. It is that commitment that separated the cooperative approach from that of competitors. 

As the environment shifts, credit unions are investing for growth. Employment is up, new branch models are being deployed, technology initiatives — from core processing systems to mobile banking applications — are being launched, and marketing expenses are rising. These investments are important to sustain the industry’s momentum.

Just as important as making new investments for growth is sustaining the commitment to members that credit unions demonstrated during the downturn. It is that commitment that separated the cooperative approach from that of competitors. Credit unions are in a stronger market position now than ever before. If they can maintain their cooperative focus in the face of both continuing successes and evolving challenges, they will further fortify their role as the only financial system that consistently acts in consumers’ best interests.