3Q CU Trends: One of the Most Fascinating Times in History

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Credit unions continue operating in one of the most unusual, thought-provoking modern day periods in history. Deposits are still sitting at record highs. Loan growth is gaining moderate momentum. Provisions set aside for loan losses remain robust. And return-on-assets is the highest ever this century.

The industry remains awash in liquidity due to a significant jump in deposits within an extremely short period of time. More money has flowed onto households' personal balance sheets from a handful of congressional fiscal relief initiatives, doubled-down alongside monetary relief policies by the Federal Reserve to keep short and long-term interest rates very low over the past year-and-a-half.

Industry leaders remain cognizant that skyrocketing deposits aren't necessarily a consequence of "sticky" member relationships, but rather a flood of new money chasing goods and services in an economy impacted by higher-than-average annual inflation growth.

In fact, on the lending front, credit unions have started losing market share to banks and fintechs in many loan products — an unfortunate twist of fate that industry leaders are tackling through new discussions and innovative experiments.

Third-quarter U.S. credit union trends were presented this past week (view entire slide presentation here). From Sept. 30, 2020 – Sept. 30, 2021 (year-over-year unless otherwise noted), credit unions nationwide experienced the following:

Highlights (Annualized)
Assets hit a record $2.04 trillion, more than doubling from $1 trillion in 2013. This was fueled by new consumers joining credit unions and bringing their deposits, existing members joining more than one credit union, and monetary inflation (to a lesser extent) over time. Assets rose 12.9 percent (compared to 16.1 percent in the year-ago period prior).

  • Loans reached $1.24 trillion, rising 5.8 percent (compared to 6.3 percent in the year-ago period prior).
  • Deposits reached $1.77 trillion, rising 14.4 percent (compared to 18.2 percent in the year-ago period prior).
  • Investments reached $711 billion, rising 28.6 percent (compared to 44.8 percent in the year-ago period prior).
  • Capital (retained earnings for net-worth purposes) reached $218 billion, rising 7.4 percent (compared to 9.4 percent in the year-ago period prior).
  • Membership reached 130.2 million, rising 4.1 percent (compared to 3.4 percent in the year-ago period prior).

Loan Trends (Annualized)
U.S. credit union loans reached $1.24 trillion, rising 5.8 percent (compared to 6.3 percent in the year-ago period prior).

  • Loan demand continues its record-breaking pace. Credit unions added $70 billion in new lending over the past year (outstanding amount).
  • Newly originated loans totaled $595 billion during third-quarter 2021 — a 19 percent origination increase over the same quarter in 2020 and 73 percent higher than originations in the same quarter from 2016.
  • The loan-to-deposit ratio (aka “loan to share”) has inched up for the second consecutive quarter as record loan originations just now start to stick on balance sheets (an evolving/growing trend). It is approximately 70 percent (down from nearly 85 percent in third-quarter 2018).
  • From a quarter-over-quarter perspective, consumer lending remains healthy (although first mortgage growth slowed a bit). However, record loan originations over the past couple of quarters are not yet fully translating onto balance sheets from a year-over-year lookback perspective — but they will very soon.
  • First-mortgage growth is decelerating after posting a record year. However, growth from an “outstanding” perspective is still huge.
  • Home equity loans are starting to experience faster pick-up over the past couple of quarters. Many consumers are applying for (and receiving) HELOCs/home equity loans but not drawing on them too much.
  • Used auto lending is experiencing significant growth even as used-auto prices have skyrocketed. Some of this is due to consumers not being able to find new cars to purchase due to supply-chain computer chip shortages for vehicles.
  • It seems credit card lending still isn’t growing, and that is technically true for now due to paydowns/payoffs coming out of most of 2020 (a year-over-year perspective). This is poised to change going forward.
  • Nonetheless, lending balances expanded across all major loan products between June to September of this year from a quarter-over-quarter perspective.
  • There is a recent rebound in indirect-lending programs that’s helping fuel total loan growth as well. Simultaneously, investment yields in the financial markets have declined over the past year relative to prior years, making indirect lending a recently attractive option in the continuing search for yield.
  • Secondary-market mortgage sales to the wholesale market has slowed as credit unions put a greater emphasis on managing this area of their balance sheets (interest rate risk and strategy).
  • Credit unions have also been turning to secondary loan market “participations” to help manage the balance sheet (both consumer and business lending), with the outstanding loan-participation level nearly doubling from the $2.5 - $3 billion range from 2016 – 2019 to $7.6 billion by 2021.
  • The asset quality ratio is improving (reaching a historic low of 0.72 percent in 2021 from 1.31 percent in 2016). Simultaneously, the delinquency ratio is at a very low 0.46 percent in 2021 compared to 0.77 percent in 2016, and the net charge-off ratio is at 0.26 percent in 2021 versus 0.54 percent in 2016.
  • Year-over-year delinquency improved across all major loan products.
  • Credit unions have significantly pulled back on their quarterly provision for loan losses (PLL) over the past couple of quarters. However, the industry’s PLL reserves are still approximately double today of what they were pre-pandemic (early 2020 and late 2019). The coverage ratio (reserves to cover loan losses) was nearly 205 percent in 2021 (compared to 199 percent in 2020 and 116 percent in 2016).

Deposit Trends (Annualized)
U.S. credit union deposits reached $1.77 trillion, rising 14.4 percent (compared to 18.2 percent in the year-ago period prior).

  • Credit unions added $223 billion in deposits over the past year.
  • Deposits have increased $677 billion from $1.09 trillion in 2016 to $1.77 trillion today.
  • While deposit growth is slowing, members continue to save money at a record pace.
  • Deposit growth (20 and 23 percent respectively in fourth-quarter 2020 and first-quarter 2021) has slowed one year after some of the nation’s largest congressional federal relief packages passed in early to mid-2020 — now down to 14.4 percent (due to year-over-year comparison).
  • Credit unions are attracting more “loyal” member deposits, and these deposits are “sticking” to balance sheets.
  • Liquid core deposits remain the deposit product of choice for members (checking, savings, and money market accounts), with core deposits increasing their share of the total-deposit portfolio.
  • Credit unions’ “cost of funds” drop is stabilizing. Historically, this has gone from 0.58 percent in third-quarter 2016 to nearly 1 percent in late 2019, then to 0.49 percent by third-quarter 2021.
  • Total checking accounts and checking penetration both hit record highs: approximately 61 percent penetration (from 56 percent from 2016), and 79 percent of members having a checking account (from 60 percent in 2016).

Earnings & Capital Trends (Annualized)
U.S. credit union capital (retained earnings for net-worth purposes) reached $217.8 billion, rising 7.4 percent (compared to 9.4 percent in the year-ago period prior).

  • Credit unions are awash in liquidity due to record deposit levels.
  • Top-line earnings are up, aided by non-interest income.
  • Yields remain unchanged (4.4 percent gross yield on loans, 0.88 percent yield on investments, and 0.49 percent cost of funds).
  • The gap between the net interest margin and operating expense ratio has stayed steady, with the former at 2.59 percent and the latter at 2.8 percent (a 21 basis-point differential). Credit unions have tried — and have been mostly successful — at continuing to lower their expense growth rate over time.
  • Credit unions cut fees during the pandemic, and those fees now remain below average today. They are creatively finding ways to keep earnings sustained without increasing fees (or even lowering fees in many cases).
  • Return on assets (ROA) is at its highest level so far in the 21st Century (at 1.11 percent), which will eventually help feed into either 1) net-worth/capitalization levels going forward for some credit unions, or 2) a little more risk-taking in lending for others. Most ROA growth came from controlling expenses.
  • Strong earnings are bolstering industrywide capitalization rates, with the industry’s nationwide capital ratio figure coming in at 10.7 percent and net worth ratio at 10.2 percent.
  • Despite industrywide growth, unfortunately credit unions are ceding market share to banks and fintechs in many loan product categories.

Membership Trends (Annualized)
U.S. credit union membership reached 130.2 million, rising 4.1 percent (compared to 3.4 percent in the year-ago period prior).

  • Credit unions added 5.2 million new members over the past year.
  • Membership has increased 21 percent from 107.5 million in 2016 to 130.2 million today.
  • The average member relationship grew $1,308 over the past year, driven by deposit relationships. It now stands at $22,175 ($13,509 in deposits and $8,666 in loans).

Human Capital/Operational Trends (Annualized)
The ability to hire and retain employees is on the top of every credit union CEOs agenda.

  • Hiring the right workforce is the No. 1 internal challenge for credit unions today.
  • The tight U.S. labor market has posed issues to credit union staffers, especially those on the front lines (onsite branch staff and onsite and/or remote customer service staff).
  • Employee compensation increased at credit unions over the past year as they fight to compete for a front-line workforce that is currently in high demand.
  • Employees are being asked to “do more” for a growing credit union membership base.
  • With strong earnings, the industry at large has room to take calculated risks.
  • Some important questions are: How can the industry invest in staff, members, and communities to maximize its impact? How will credit unions use COVID-accelerated technologies to drive member relationships and impact financial delivery channels in the long run? How will credit unions go beyond “table stakes” to differentiate themselves in a commodity marketplace (financial services) and “rediscover” their purpose?

(All trends were presented by Callahan & Associates during the firm’s Third Quarter Trendwatch Webinar)

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