The Credit Union Opportunity In A Pro-Consumer Movement

Consumers have emerged from the economic downturn with new power and are contributing to credit unions' record assets and new highs in lending activity and core account relationships.



The growth momentum in credit unions has continued unabated since the economic downturn, pushing industry assets to top $1 trillion in the first quarter of 2012. What began as a flight to safety for many consumers has led to new recognition of credit union value and values.

Households across the country are re-evaluating their relationships with financial institutions. Although the financial stability of an institution remains important, consumers are increasingly looking for more. They want an institution that looks after their savings balances as well as their financial well-being. They are asking more questions about their financial institution: Is it more interested in my financial needs or in promoting its latest product? Is it clear about the “real” rates and fees it charges on accounts? Will it be willing to help me when I need it? Are my savings helping my community or are they going elsewhere?

Consumers have emerged from the downturn with new power. Media outlets ranging from print newspapers and network news to online bloggers have put the spotlight on institution-focused, bottom-line-first policies and practices. The Occupy Movement and Bank Transfer Day are expressions of frustration with what many see as one-sided relationships. Government actions such as the creation of the Consumer Financial Protection Bureau are attempts to correct the imbalances – and in some cases, abuses – in financial institutions’ dealings with consumers.

In this environment, the media increasingly highlights credit unions as alternatives that not only deliver better rates and fees but also put their members first. Credit unions are demonstrating a consistent commitment to their membership that is translating to stronger relationships. New members are recognizing the different approach taken by credit unions and bringing over loan and savings balances. Long-time members have re-engaged and made their credit union their primary financial institution. These dynamics are creating record assets and new highs in lending activity and core account relationships.

Surpassing the trillion dollar mark has already designated 2012 as a landmark year for credit unions. However, asset size is often viewed by credit unions as an outcome of what they are doing for members, not an end goal. That perspective has driven credit unions for more than 100 years and will be the key to their success in 2012 and beyond.



Record First Quarter Lending

Credit union loan balances reached $579.5 billion as of March 31, rising 2.1% over the past year. However, this modest balance sheet growth of the portfolio does not reflect the record lending activity generated by credit unions. Loan originations in the first quarter were $72.5 billion, a new high for the quarter and one of the 10 largest lending quarters ever for the industry.

Origination activity jumped 24.7% versus the first quarter of 2011 as all major lending categories posted higher volume. Growth in outstanding loans has accelerated over the past year in every loan type except for other real estate loans, which primarily consist of home equity loans.

Refinancing plays a significant factor in the volume. Members are taking advantage of continued low interest rates and improving their cash flow by reducing their monthly loan payment minimums. Credit unions are helping to enact the goals of the Federal Reserve’s low rate policy at the consumer level. According to the Bureau of Economic Analysis, household interest payments nationally have fallen more than $3,000 since 2007, from more than $8,700 to $5,600. Consumers are taking that reduced payment burden and re-allocating dollars to further reduce their debt, increase their savings cushion, or spend on items they have held back on in recent years.

Credit unions across the country have launched initiatives to help members save money through refinancing and are rewarding staff for the amount they have saved members. Educators Credit Union ($1.4B, Racine, WI) had saved its members $20 million by mid-May through it Fast Lane Financing program, bringing the total to more than $50 million since 2008. The credit union tracks its success by the amount members have saved – another expression of credit unions’ member-first philosophy.

Lower debt payment requirements and an improved economy are also helping members better manage their borrowings. Asset quality continues to improve across the industry with the delinquency rate falling to 1.45% and net charge-off rate reaching 0.79%. Although both rates remain above historical norms for credit unions, the net charge-off rate is now just 13 basis points above the level recorded in the first quarter of 2008. By comparison, bank asset quality remains elevated with a delinquency rate of 4.11% and net charge-off rate of 1.17% as of March. Banks are posting improvements in these categories, but credit unions are maintaining a quality advantage in their loan portfolios.



The No. 3 Mortgage Lender In The U.S.

First mortgage originations rose 46.5% in the first three months of 2012 versus a year ago. Credit unions’ $26.1 billion in first mortgage volume accounted for 8.2% of all first mortgage loans originated in the U.S. in the first quarter. This record-high market share is the first time the industry has topped 8% and makes credit unions the third-largest mortgage lender in the U.S. At 36%, Wells Fargo was the first quarter market leader, followed by JPMorgan Chase at 11%. Bank of America, with an asset base more than double that of credit unions, originated 4% of first quarter mortgage volume.

On the balance sheet, first mortgages outstanding rose 4.9% to more than $237 billion. First mortgages are the largest component of the credit union loan portfolio at 41%. Credit unions remained active in the secondary market by selling $13.5 billion, more than 51%, of first mortgage originations in the first quarter.



Managing interest rate risk in this historically low rate environment remains a priority for credit unions. First quarter 2012 marks the fourth consecutive year that credit unions sold more than half of first quarter mortgage volume to the secondary market. Fixed-rate first mortgages comprised 14.5% of the balance sheet as of March, virtually unchanged from the 14.1% level recorded 10 years ago in 2002.

Other real estate loan originations were steady in the first quarter versus a year ago at $3.8 billion. Balances in this category have fallen 7.7% over the past year as many members refinance and roll home equity loans into a first mortgage.

Modified real estate loans remain an indicator of credit union efforts to keep members in their homes. Credit unions held $10 billion of modified first mortgages and more than $1.3 billion of modified other real estate loans on their balance sheets as of March. These loans represent more than 65,000 members that have been helped by credit unions.



Consumer Lending Is A Driver For Credit Unions

Although mortgage lending rose at a fast pace in the first quarter, consumer lending remains the driver for credit unions. Consumer loan originations increased 16.7% versus a year ago to reach $39.2 billion, comprising 54% of all lending activity in the quarter.

Used auto lending activity set the pace in the quarter with a 6.6% increase in outstanding balances, topping $110 billion as of March. Credit unions have been active in reaching out to members with opportunities to refinance auto loans at better rates, capturing new balances from competitors.

New auto lending remains a challenge as captive finance companies offer 0% financing options. Although new auto loan balances have declined 4.0% over the past year, the rate of decline has slowed measurably from the 14.6% rate posted a year ago. Still, auto lending remains a core business of credit unions, accounting for almost 30% of the loan portfolio.


Credit cards have been a bright spot for credit unions. Competitors pulled back during the downturn, giving credit unions an opening to attract new accounts. Banks cut credit card lines by more than $1 trillion during the recession, but credit union card accounts, lines, and balances are growing. Balances reached $36.6 billion as of March, up 4.7% over the past year.

Member business loans rose 8.4% over the past year to $34.4 billion. Originations were up to $3.3 billion in the first quarter, a 13.8% increase from a year ago.

Core Deposits Fuel Share Growth

Members have added $54.9 billion in net new share balances over the past year, a 6.7% growth rate. The rate of growth is the fastest posted by the industry through the first quarter since 2004. Share balances were at a record high of $877.7 billion at March 31.

Stronger member relationships, reflected in core deposit account balance increases, are driving share growth. Share draft balances are up 16.2% over the past 12 months, topping $113 billion. Checking account balances are growing along with the number of new checking accounts. The rate of growth in new accounts has accelerated to 4.4% over the past year, more than double the rate of membership growth.


Credit unions are capturing new accounts as larger banks implement new fees on checking accounts to offset the reduction in debit interchange income. Even the largest credit unions, which are also impacted by the Durbin Amendment’s interchange reduction, are gaining accounts. The four credit unions with more than $10 billion in assets have averaged a double-digit increase in checking balances. Even with reduced interchange per transaction, credit unions benefit when members use their debit cards as it regularly reinforces the credit union brand, generates interchange revenue, and eliminates check processing costs.

According to Callahan & Associates’ 2011 Non-Interest Income Survey, more than 22% of credit unions’ non-interest income comes from debit interchange, underscoring its importance. As consumers increasingly turn to debit cards over checking, the rise in debit card transaction volume will continue to place interchange income as a material component of credit union revenue streams despite the impact of Durbin. Credit unions’ momentum in adding new checking accounts is providing the foundation for this, with the percentage of members with a credit union checking account rising from 41% to 51% over the past 10 years.

Regular shares also grew at a strong rate, up 11.8% since March 2011 to hit $280.7 billion. They remain the largest component – 32% – of the deposit portfolio. Money market accounts also attracted member deposits, up 7.9% annually and close to topping certificates as the second-largest component of the portfolio. Certificates are the only segment of the portfolio to decline over the past year, falling 3.2% as members chose to remain in liquid accounts given the interest rate environment.

Investment Balances Approach $400 Billion

Continued growth in shares is adding to credit union liquidity. Investment balances reached $396.6 billion as of March. The pick-up in loan growth has slowed the rate of growth from 15.1% to 14.3% over the past year, but the loan-to-share ratio continued to fall, reaching 66.1% at the end of the first quarter.

Record liquidity is occurring as investment yields drop to new lows. The 1.35% average investment yield through March is off 31 basis points versus a year ago. The importance of lending has never been more apparent with the average loan yield at 5.60% – more than four times what credit unions are earning on investments though credit unions are earning much less than the average on new investments.

Agencies are the largest component of the portfolio today, accounting for close to half of all investments. Agency balances are up more than 16% over the past year. Investments at banks and S&Ls are now the number two category as corporate credit unions captured just 11.4% of investable funds. Investment balances in corporate credit unions are down 30% over the past 12 months. With the corporate credit union share guarantee expiring at the end of 2012, it will be no surprise to see corporate balances accounting for less than 10% of the investment portfolio a year from now.

Credit unions have extended their investments in recent years to try to pick up additional yield. The percentage of investments maturing in more than one year is now 52.7%, up from 42.0% three years ago. Still, credit unions remain short overall as cash and equivalents totaled $117.8 billion or 30% of total investments.


ROA Highest Since 2005

Total revenue for the first quarter was on par with first quarter 2011. Although interest income has declined, non-interest income is on the rise, up 13.2%. The primary driver of this growth is other operating income, which is being helped by fees earned on sales of mortgages to the secondary market. As a percentage of average assets, fee income held steady over the past year at 70 basis points. Other income rose from 52 basis points to 61 basis points versus a year ago.

As the low interest rate environment pushes down asset yields, the net interest margin is also tightening. The margin fell 18 basis points over the past year to 2.98%, the first time in recorded credit union history it has been below 3.0%. Although cost of funds is at 87 basis points, deposit rates are not falling as fast as loan and investment yields.

With margins tightening, credit unions are focusing on expense management. Operating expenses grew 5.4% versus a year ago, led by increases in salaries & benefits and office operations. Operating expenses as a percentage of assets declined two basis points over the past year to 3.04%. Credit unions are accruing for another corporate stabilization assessment this year, with an average accrual of 5 basis points through the first quarter.


Credit unions are benefitting from improving asset quality. The provision for loan losses is 20.7% lower than in the first three months of 2011. As a percentage of assets, the 40-basis-point expense is at 2005 levels. The reduction in the provision provides a boost to net income.

Earnings topped $2 billion in the first quarter, up 20.6%, as the industry’s return on assets reached 88 basis points before NCUA assessment accruals. This marks the highest ROA since 2005.

Capital grew along with earnings, surpassing $110 billion as of March. The 10.0% net worth ratio and 10.9% total capital ratio, including the allowance for loan losses, are equal to March 2011 results. The strength of the industry’s balance sheet is reflected in the coverage ratio, or the percentage of delinquent loans covered by the allowance for loan losses. This ratio stood at 104.9% as of March, up from 100.8% a year ago.

The Long-Term Advantage



Topping $1 trillion in assets, achieving new highs in national first mortgage lending market share, and posting record membership levels reflect the growing impact credit unions are having on the markets they serve. As the industry grows in size, delivering value to the 93.8 million credit union members is paramount.

Credit unions have grown from a $700 million industry 50 years ago to more than $1 trillion in assets today by taking a cooperative approach to member service. This philosophy is reflected in how they treat members as well as in how they think about their business capabilities. Credit unions have used collaboration as a strategic means to deliver value to members. Shared branching, shared ATM networks, shared data processing platforms, shared lending programs, and shared investment and insurance programs for members are the result of credit unions working together to better compete in the market and be more relevant to members.


As the industry grows in size and presence, it is critical that CUs continue to leverage their cooperative strategic advantage. Although the combined asset base is significant, it still does not approach the largest banks in the country. Combining intellectual, financial, and human resources to achieve more than what any individual credit union can achieve on its own must be a consideration of every credit union business plan.

Credit unions have an advantage in the cooperative model, and not just because of their tax status. They can take a long-term view. They are not pushing for quarterly earnings targets, but they do have an obligation to deliver better value for their members. Consumers are recognizing the credit union value, which partially comes from the values credit unions adhere to. It is ultimately about each member’s financial well-being. Credit unions will realize their next trillion dollars not by trying to imitate what competitors are doing but by continuing to follow the core principles that drove their success to this point.

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