Credit Unions Grow Through Post-Recession Decade

This year marked not only the end of a decade, but the passing of the 10-year mark on an economic expansion since the Great Recession of 2007 to 2009.

Just as credit unions were gearing up a year ago for higher interest rates, rates fell and margins were squeezed. Meanwhile, car lending continued to slow, even as real estate lending spiked with a new wave of refinances.

Refinances are expected to diminish next year, putting more pressure on credit unions to find new avenues for growth.

The economy is not the only worry for credit unions. Many have also been concerned by changes in the way people spend, save and borrow. No area of the business model for lenders seems to be immune.

In the automotive and real estate markets, new online competitors continue to rewrite the rules.

Even with those facts, the decade has been good to credit unions. At the end of 2009, they had 89.3 million members and $884.7 billion in assets. As of Sept. 30, they had 119.6 million members and $1.54 trillion in assets.

Bank assets have grown slower. They stood at $18.48 trillion as of Sept. 30, up 4.6% from 12 months earlier, compared with the 6.8% gain of credit union assets. Over the past 10 years, bank assets grew 4% per year, while credit union assets grew 7.4% per year.

The good times continued through 2019. Credit unions widened their reach in most markets. Growth was slower, but it was still growth. The inversion of the yield curve last spring was an indication that a recession could start as soon as early next year based on past patterns. But economists are now talking less about recession, and more about a continued slowing of growth.

So just how did the numbers come in for the year? In early December, the NCUA released its comprehensive data for the third quarter. Using that as the end point and extending back to Oct. 1, 2018 provides a full 12 months of credit union experience.

The first half of that period showed declining loan originations, with the mortgage gains kicking in during the spring. Overall, credit unions generated $516.4 billion in new loans in the 12 months ending Sept. 30, rising only 2.1% from 2018’s third quarter.

Total residential real estate originations, including second liens, were $164.9 billion for the 12 months, up 7.5%, with long-term fixed rate mortgages leading the pack.

The Mortgage Bankers Association estimated that 38% of first-mortgage originations in the third quarter were refinances among all types of lenders nationwide, up from 24% in 2018’s third quarter. The MBA said it expects refinances to be peaking now at 51%, but fall to 29% by 2020’s second quarter.

Credit unions originated $18.2 billion in commercial loans backed by real estate in the 12 months ending Sept. 30, down 3.6% from the prior 12 months. Originations of non-real estate commercial loans rose 5% to $3.8 billion.

Outside of real estate, originations for everything from cars to credit cards to unsecured term loans were $330.1 billion for the 12 months ending Sept. 30, almost unchanged from a year earlier.

Overall, loan quality remained good. The value of loans at least 60 days overdue stood at $7.3 billion on Sept. 30, up 5.5% from a year earlier. The 60-day delinquency rate was 0.67% on Sept. 30, down from 0.71% a year earlier. The net charge-off rate ended the year at 0.40%, little changed over the course of the year.

However, credit card quality worsened. Delinquencies rose 12.1% to $842.6 million as of Sept. 30, significantly exceeding their 7.4% growth rate in balances and generating a delinquency rate of 1.32%, up 5 basis points from September 2018. Also, credit unions charged off $1.9 billion in the 12 months ending Sept. 30, up 14.8% from the prior 12-month period.

Production of loans contributed to average assets growing 6.2% over the 12 months. Credit unions’ return on those assets was 0.93%, up 2 basis points from the prior 12-month period.

The income story showed net interest income (before loan loss provisions) being compressed by falling rates in the third quarter, but exceptionally strong margins last winter allowed net interest to rise 8.9% to $47.1 billion over the 12 months. Loan loss provisions were essentially unchanged at $6.6 billion.

Noninterest income gains were below par: Fee income rose 4.3% to $9 billion, and other operating income rose 3.9% to $11 billion.

Expenses were above par: Employee compensation and benefits rose 8.5% to $24.2 billion, and other operating expenses rose 8.6% to $23.2 billion.

Add and subtract all those numbers, and credit unions had a net gain of $13.8 billion for the 12 months, a not-too-shabby 8.6% increase. Net worth grew 8.5% to $175.2 billion.

For members, the question is how their credit union is deploying their capital to better their lives.

Some credit unions are paying out special cash dividends to members. Others are investing to keep up with members’ rising expectations.

Navy Federal Credit Union in Vienna, Va. ($110.1 billion, 8.9 million members), the nation’s largest credit union, rolled out a major reorganization of its mortgage lending platform this year. The second largest, State Employees’ Credit Union of Raleigh, N.C. ($40.9 billion, 2.5 million members), launched a makeover to be completed in 2020.

In early December, Alliant Credit Union in Chicago ($12 billion, 483,907 members) rolled out a new online banking platform with a “sleek new look, intuitive dashboard and delightfully simple navigation.” Behind what the members see is technology designed to allow the credit union to quickly add more features as members request them.

Even as more members carry out transactions online, one of the biggest expenses for financial institutions continues to be reaching members brick by brick.

Among banks, both the number of institutions and branches have been declining.

While the number of credit unions is also declining, the number of their members and branches has grown.

NCUA data showed that the 5,390 federally-insured credit unions on Sept. 30 had 21,956 branches, or one for every 5,508 members.

That’s not much more than five years earlier when the 6,743 credit unions had 21,928 branches, or one for every 4,558 members. But the number later fell, and 82 branches were added in the last year.

Some of those branches used to be homes to small banks whose shareholders realized they were better off cashing out and letting their customers become credit union members.

Small scale is still a challenge for credit unions.

Usually credit union statistics are grouped by geography or asset sizes. But they can also be measured from the vantage of members.

For example, half of members belonged to one of the 171 credit unions with 128,000 or more members as of Sept. 30. Comparing the experiences of those two groups showed:

• The 5,254 smaller credit unions had 61.5 million members on Sept. 30, 2.1% more than a year earlier. Larger credit unions had 59.4 million members, up 6.3%.
• Smaller credit unions had $747.1 billion in assets on Sept. 30, up 5.4%. Larger credit unions had $809.4 billion in assets, up 9.3%.
• Smaller credit unions had $1.6 billion in third-quarter net income, up 0.3%. Larger credit unions had $2.3 billion, up 5%.
• Smaller credit unions generated annualized returns in the three months ending Sept. 30 that were 0.84% of average assets, down 4 basis points from a year earlier. Larger credit unions had ROA of 1.13% in third quarter, also down 4 bps.
• Smaller credit unions had $500.4 billion, up 5.9% in third-quarter average loans. Larger credit unions had $587.7 billion, up 7.5% in third-quarter average loans.
• Smaller credit unions originated $59.2 billion in total loans during the third quarter, 7.9% more than in 2018’s third quarter. Larger credit unions originated $92 billion in loans, up 16.1%.
• Smaller credit unions had $21.83 in fees per member in the third quarter, up 3.2%. Larger credit unions had $18.35, up 4.1%.
• Smaller credit unions’ third-quarter employee costs were 50.8% of noninterest expenses in the third quarter, up 28 bps. Larger credit unions’ rate was 51.1%, down 14 bps.