4Q CU Trends Released: the ‘Why’ Behind the Numbers

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Recently, the U.S. credit union industry’s refinance-mortgages have been driving overall lending, and certificates-of-deposits (CDs) are boosting total deposit growth.

As credit union leaders take pulse of the economy’s changes, they experienced these year-over-year trends and many others during fourth quarter of 2019. The following is a synopsis of Callahan & Associates’ latest “Trendwatch” webinar hosted this past week. It was presented by Chief Collaboration Officer Jay Johnson and CEO Jon Jeffreys.

By fourth-quarter 2019, the U.S. credit union industry saw the following year-over-year trends:

CU HIGHLIGHT TRENDS

  • While membership (122 million) and assets ($1.6 trillion) reached new highs — and loan originations set new records — year-over-year loan growth continued to decelerate (outstanding amount at $1.12 trillion). Meanwhile, certificate-of-deposit (CD) growth drove total deposit balances ($1.34 trillion) to a new record. Investments were at $390 billion and bottom-line capital (net worth/retained earnings) at $188 billion.
  • As annual membership growth also slows down, credit unions are still attracting deposits at a healthy clip. More than 4 million consumers and businesses joined a credit union in 2019. However, the membership-growth slowdown is mostly being driven by a downshift in indirect lending (namely indirect auto loans).
  • Credit unions topped 300,000 full-time employees (FTE calculation) by late 2019 for the first time ever (up from 246,000 in 2014) — a record. Taken as a combined “company,” the U.S. credit union industry would be the 12th largest employer in the nation.
  • Loan growth remains solid even as it slows down. The years of 10 percent year-over-year lending acceleration (2014 – 2017) are no more, as 2019 experienced 6 percent growth.
  • Certificates-of-deposit (CDs) make up nearly half of all combined annualized deposit growth categories altogether. The industry’s total deposit balance has reached all-time highs ($1.34 trillion versus $963 billion in 2014).

CU LOAN TRENDS

  • Loan originations rose 9 percent, reaching yet another all-time high. The lower interest rate environment helped drive a surge in refinance mortgages and fixed-rate mortgages, which helped drive lending growth in the latter half of 2019. In general, the entire U.S. mortgage industry experienced the largest quarterly spike in refinance mortgages since 2013 — which may signal even more acceleration in the first-half of 2020 and be a continued driver of lending growth.
  • Credit unions originated a record amount of loans to members ($558 billion versus $354 billion in 2014). The industry ended last year with three consecutive quarters of absolute all-time new highs in quarterly loan originations. Mortgages mostly helped drive this trend (first mortgage originations made up 32 percent of total loan volume in 2019).
  • As auto sales and auto loan growth is down year-over-year, credit unions are trying to fill the gap with credit card lending and personal loans.
  • The following are lending category growth rates in 2019 versus 2018, respectively: first mortgages — 9.5 versus 9.2 percent; other real estate — 3.6 versus 7 percent; new autos — 0.1 versus 11.7 percent; used autos — 4.2 versus 9.1 percent; credit cards — 6.7 versus 7.5 percent; and total loans — 6 versus 9 percent. (The first mortgage category was the only area accelerating compared to the year-ago period)
  • The indirect-loan category ($230 billion) posted its slowest annual growth since 2012 (2.7 percent versus a range of 14 – 22 percent from 2012 – 2018 depending on the year). This was mostly due to lower indirect auto lending originations.
  • Total loan delinquency remains sable and mostly unchanged since year-end 2018. The following loan categories had delinquencies of: 0.71 percent (total loans); 0.55 percent (first mortgages); 0.65 percent (autos); 0.55 percent (other real estate); 0.66 percent (indirect loans); 1.4 percent (credit cards); and business/commercial loans (0.54 percent).

CU DEPOSIT TRENDS

  • Certificates-of-deposit (CDs) drove total deposit growth, with annual total deposit growth outpacing loan growth for the first full calendar year since 2012. “Core deposits” (checking, savings, and money market accounts) have been the foundation of the credit union deposit portfolio — a good sign. Core deposits continue making up 72 percent of total deposits.
  • Credit unions had some real concerns regarding funding liquidity levels at the beginning of 2019, but by the end of the year they did “very well” on driving deposit growth higher. Deposit balances grew at the fastest rate since 2009. CDs comprised 49 percent of total deposit growth.
  • The following are deposit category growth rates in 2019 versus 2018: CDs — 20.5 versus 12.3 percent; IRA/Keogh — negative 0.2 versus 5 percent; money market — 5 versus 0.9 percent; checking — 9.3 versus 5.2 percent; savings — 3.8 versus 5.3 percent; and total deposits — 8.2 versus 5.2 percent.
  • The loan-to-share ratio (at 84 percent) decreased between third and fourth-quarter 2019 for the first time since 2015 due to the confluence of a slowdown in lending growth combined with better-than-expected deposit growth. The last high was nearly 86 percent in late 2018.

CU MEMBERSHIP TRENDS

  • Member product usage is trending higher as checking-account penetration reached an all-time high (59 percent). In fact, the average member relationship continued to grow, reaching $19,473 (loans and deposits combined — $8,613 and $10,860 respectively).
  • Notably, credit unions have attracted new members and deepened existing relationships over the past five years, especially when it comes to credit cards, mortgages, checking accounts and auto loans. Even as year-over-year membership rates are slowing, higher product penetration rates for existing members continues rising (more members are transferring “their business” to their credit unions).
  • Members opened 3.8 million more checking accounts in 2019 than in 2018. Total accounts are now 71.6 million (a 59 percent record-high penetration rate) compared to 54.2 million (or 54 percent penetration) in 2014.
  • In 2019, about 1 million new checking accounts were opened each quarter.

CU ASSETS, CAPITAL, OTHER TRENDS

  • While revenue increased 11 percent and the industry’s total net-worth ratio reached 11.4 percent; the net interest margin (NII) expansion recently being experienced is now slowing down.
  • Interest income from loans expanded the fastest of all income streams ($62 billion in 2019 versus $37 billion in 2014) — compared to fee income ($9.2 billion in 2019 versus $7.3 billion in 2014) and other operating income ($11.5 billion in 2019 versus $7.2 billion in 2014). Basically, over the past five years interest income from loans has become a huge player in total revenue compared to much slower/diminishing growth from fee income and other operating income.
  • However, the “cost of funds” (deposit expense) grew faster than loan yields in 2019 (due to a competitive deposit marketplace for liquidity).
  • Net interest margin (NII) fell below the operating expense ratio (“op ex”) in the fourth quarter after matching it in the third quarter (op-ex being 3.21 percent and NII being 3.17 percent in fourth-quarter 2019). These were, respectively, 3.11 percent and 2.84 percent (a much wider margin of 27 basis points) in 2014.
  • Return on assets (ROA) ticked up in 2019 to hit 0.93 percent by end of fourth quarter (after dipping to 0.75 percent in 2015).
  • The industrywide net worth ratio was 11.4 percent, up 8 basis points year-over-year (and up from 11 percent in 2014). The industry has nearly $181 billion in bottom-line capital, up from $125 billion in 2014. (The total loan loss allowance has risen from $7 billion in 2014 to $9.7 billion in 2019)
  • Both banks and credit unions consolidated their footprint over the past decade, but there are now more credit unions than banks in 2019 compared to 2009. In 2009, 8,012 banks were operating versus 7,710 credit unions. But as of 2019, there were 5,256 banks operating versus 5,396 credit unions. Essentially, bank consolidation has occurred much more quickly over the past 10 years.
  • Credit union loan originations in 2019 were more than double the volume recorded in 2009 ($558 billion versus $272 billion) — a 105 percent increase. Credit unions are lending $1.5 billion every day of the year to their members.
  • The industry’s total loan balance has almost doubled since 2009, from $581 billion to $1.12 trillion today. Also, credit unions added almost $573 billion in deposit balances over the past 10 years (with the number of checking accounts rising from 43 million in 2009 to nearly 72 million in 2019 — a 68 percent increase).
  • Member usage of certain lending products has gone from 17 percent in 2009 to 21 percent in 2019 (auto loans) and 14 percent in 2009 to 18 percent in 2019 (credit cards).

WHAT WILL THE 2020s BRING?
As competition intensifies and interest rates remain low, credit unions need to have clarity around their purpose and tell their communities “why” they are different, the webinar presenters said.

Financial stress remains high for many consumers. However, credit unions can be leaders in supporting members’ financial wellbeing. Listening and responding to member needs continues to be the key to success.

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