3Q: Mortgages Bolster CUs as They Reinforce Loss Provisions

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U.S. credit unions’ third-quarter 2020 financial results show a nearly identical trend coming out of the previous quarter. Refinance mortgages, purchase mortgages, and used auto loans are bolstering the industry’s lending growth as it continues stashing away higher loan-loss provisions and bracing for a possible wave of delinquencies and charge-offs in 2021.

The latest positive and negative trends released this week keep showing an evolving world for credit unions nationwide as they served members going from summer into autumn. Their balance sheets spotlight an enigma of deposit-and-loan COVID pandemic trends — namely an economy in recovery, household budgets recuperating, savings rates skyrocketing, and record low interest rates mostly incentivizing purchases of homes, vehicles, or refinancing of both.

This changing picture was presented by Callahan & Associates Chief Collaboration Officer Jay Johnson and CEO Jon Jeffreys during this week’s “Third Quarter Trendwatch” webinar (click here for presentation slides). From Sept. 30, 2019 – Sept. 30, 2020 (year-over-year unless otherwise noted), U.S. credit unions experienced the following:

  • Capital rose 9.4 percent to $203 billion. Assets hit $1.8 trillion (16 percent increase); loans reached $1.17 trillion (6 percent increase); deposits hit $1.55 trillion (18 percent increase); investments grew to $553 billion (45 percent increase); and membership exceeded 125 million individuals (3.4 percent increase).

  • Membership grew by 4.2 million consumers. However, annual membership growth has downshifted from well over 4 percent during 2016 – 2018 to 3.4 percent during this latest period. Credit unions now have 125.1 million members (up 21 percent from 103.4 million in 2015).

  • Mortgages helped drive total loan originations to post 25 percent annual growth — the third-quarter period’s highest volume on annual record. This helped total loan originations in the third quarter reach $186 billion compared to $110 - $151 billion during the same quarterly periods in 2015 – 2019 (a 23 to 69 percent increase in growth depending on the annualized periods being compared).

  • Credit unions also reported record total originations for each quarter this year compared to prior years (due to first mortgages). Over year-to-date 2020, total loan originations through Sept. 30 topped $500 billion, higher than the $310 – $399 billion in the prior five years (depending on the year). First mortgages drove this total-origination trend, with mortgage originations hitting $212 billion year-to-date in 2020 (a 77 percent increase from the same year-to-date period in 2019).

  • Outstanding first-mortgages held in loan portfolios was $59 billion over the past 12 months, accounting for 85 percent of the industry’s total loan portfolio growth during that period. Credit unions’ mortgage market share has now reached 9 percent of the national mortgage-lender market.

  • Total outstanding lending ($1.17 trillion) is experiencing slightly faster growth in 2020 compared to 2019 so far. This trend (6.3 percent period growth in 2020 versus 5.9 percent in 2019) is not expected to change in the last quarter of this year. This is down from a range of 9.5 – 10.7 percent from 2015 to 2018, depending on the comparison year.

  • Only two loan categories experienced 12-month growth from 2019 – 2020: first mortgages and used autos. First mortgages rose 13 percent (compared to 7 percent in the year-ago period), and used autos increased 5 percent (4 percent prior). Otherwise, HELOCs/second mortgages dropped 5 percent (versus growing 6 percent prior); new autos fell 4 percent (versus growing 2 percent prior); and credit cards dropped 5 percent (versus growing 7 percent prior).

  • Three recent lending phenomena are impacting the total loan picture. First, slower growth in indirect auto lending is playing out — a trend beginning in 2017. Annual indirect auto lending growth (22 percent in 2015) has dropped to just 2 percent in 2020. Second, credit unions continue to extend credit card lending capacity to members even though members continue paying down their revolving balances. This was already on a downtrend as credit card utilization was around 33 percent from 2015 – 2017 and then started falling, with its most recent plunge coming in first-quarter 2020 and is now about 27 percent. Thirdly, many credit unions are putting their recent increase in liquidity to work by going into loan participations, which saw an immense 43 percent growth in the third quarter (already on an uptrend from mid-2019 when the economy was plowing full-steam ahead).

  • The industry’s loan-to-deposit ratio is now 76 percent. This is down from nearly 85 percent in late 2018 and 84 percent in late 2019. Most of this is due to an immense amount of new deposits (not loans) coming in at many credit unions, skyrocketing during the COVID-19 pandemic (fueled by government relief/stimulus monies, a higher savings rate as consumers were forced to pull back their spending in the pandemic shutdowns, and a delayed tax-period payment season by the IRS from April to July).

  • Checking account penetration reached a record high, with 6 out of every 10 members holding this type of account. This metric was 5.5 out of every 10 members in 2015. Nearly 75 million checking accounts were registered as of third quarter 2020 (6 percent growth) out of more than 125 million members on file. Also, the average member relationship was still rising (total of $20,969 per member): $12,266 in deposits per member, and $8,703 in loans per member (was a total of $16,711 per member in 2015).

  • Total outstanding deposits rose from $1.3 trillion to $1.55 trillion, driven by an 18 percent jump (the largest increase on record). This 18 percent jump equals $239 billion and is driving total outstanding assets higher. The deposit growth is mostly fueled by government relief/stimulus monies, a higher savings rate as consumers have been forced to pull back their spending during pandemic shutdowns, and a delayed tax-period payment season by the IRS from April to July.

  • While all five deposit categories experienced 12-month growth from 2019 – 2020, the most liquid short-term accounts (checking and savings) topped the chart. Checking accounts rose 34 percent (compared to 6 percent in the year-ago period) and savings accounts rose 23 percent (3 percent prior), making checking/savings combined account for 73 percent of total deposit growth during the first nine months of this year. Certificates of deposit rose 2 percent (22 percent prior); IRAs/Keogh accounts increased 4 percent (3.6 percent prior); and money market accounts rose 21 percent (2 percent prior). Total deposits (all categories) increased 18 percent (7 percent prior). From a quarterly perspective, total deposit growth slowed in the third quarter (compared to second quarter) but still continues at a record pace.

  • Although asset quality (loan quality) remained strong as credit unions extended lending and payment forgiveness programs, the outlook is uncertain due to the coming impact of these relief efforts. The asset quality ratio dropped to 1 percent; the delinquency ratio dropped to 0.55 percent; and the industry’s net charge-off ratio fell to 0.47 percent. Propping up this picture is the fact that some loans are in forbearance or deferral, and it remains to be seen how they will be categorized by early 2021 as the economy continues recovering. Meanwhile, the industry is reserving earnings for a financial pinch down the road.

  • Income from various sources is a mixed picture as topline revenue growth slows (due to lower investment and fee income). “Other” operating income and loan-interest income are both up (fortunately the largest growth areas), but investment interest income and fee income are both down (which is still impacting topline revenue). Additionally, yields on income generators fell across the board as interest rates hit record lows: for loans, yield is 4.77 percent (fell slightly); for investments, yield is 1.44 percent (down dramatically). Essentially, total average loan-yield in general has fallen 15 basis points in 2020 (but in line with the 18 basis point decline in cost-of-funds).

  • Net interest margin (NIM) fell 32 basis points to 2.87 percent. Last year during the same quarter, the industry’s NIM and its operating expense ratio (OpEx) were both about the same (3.19 percent) — but not anymore. Today’s 16 basis-point spread between the two (OpEx is about 3.03 percent today) resembles a margin environment not experienced since before 2015. OpEx is declining as expenses grow juxtaposed with a low-interest rate environment, yet expenses are not being completely offset by NIM from loan revenue.

  • Quarterly provision expenses for future loan and lease losses dropped from a record high in second quarter of $2.7 billion to $2.2 billion in the third quarter. Credit unions are planning for a worse-case scenario in 2021. This compares to a $1.6 billion expense during the same quarter last year (a 38 percent increase). The coverage ratio is also at the highest level it has ever been (allowance for loan losses/delinquent loans) — at 199 percent compared to 130 percent one year ago. It means credit unions have already set aside $1.99 for every $1 in delinquent loans, not knowing how many will actually go into default and/or charge-off going forward.

  • Return on Assets (ROA) fell 33 basis points. Industry ROA was 0.98 percent this time last year, but as of Sept. 30 it had fallen to 0.65 percent. It is expected to drop further before it starts rising again.

  • The industry’s net worth ratio declined as deposits skyrocketed. It dropped from 11.4 percent to 10.4 percent (not seen since before 2015). However, besides being affected by a recent surge of incoming deposits, credit unions are also setting aside capital for challenges to come. Total net worth stands at $189 billion.

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