WASHINGTON — Credit unions as a whole — yes, even small CUs — experienced significant success in the third quarter, according to analysis by Callahan & Associates that found increases in key areas including loans and membership.
Chip Filson, the company's co-founder and chairman of the board, said during the firm's 2014 Third Quarter Trendwatch webinar last week that at "the end of September the health of the system jumps out from the numbers."
Perhaps one of the biggest surprises, however, was a reversal of a long-running trend of smaller credit unions largely being left out of all of these positive numbers — but not this time.
Filson said smaller credit unions are posting some "extraordinary" growth rates, with some doubling their portfolios over the last year.
"Just because a credit union does not have size does not mean it cannot have a dynamic balance sheet," he said.
Steve Rick, chief economist at CUNA Mutual Group, noted that CUs with assets between $20 million and $50 million have seen loan growth of 1.8% in the last 12 months. While that's more than 10 percentage points below large credit unions, "at least it's back to positive territory," he said.
The bigger problem for small institutions, according to Rick, is that in many cases "membership is still not there."
Membership at CUs with $20 million or less shrank by 1.6% in the 12 months ending in September, whereas overall membership growth was at 3.4%.
But on a macro level, CUs have been experiencing an "explosion" of membership growth not seen in 20 years, according to Rick. And, three years after Bank Transfer Day, some of the growth has started to trickle down to smaller credit unions.
"Credit unions $20 million to $50 million are growing again," he said. "The latest numbers we have are 0.6% in memberships for credit unions with assets of $20 million to $50 million. The next category, $50 million to $100 million, they're up 0.5% in the last 12 months.... If you're a $1 billion credit union, you saw membership growth of 6.3%, so there's still a huge disparity between large and small credit unions. It is coming, it is positive, but it's really small."
Entering a New Era
Time will tell whether small credit unions now are on a path toward bridging the "Great Divide" between them and their larger brethren, but CUs overall continue to post strong numbers.
"There is a constant member focus," Filson said. "Loan growth is up, membership growth is up. There seems to be some traction for the cooperative model. The percentage of members who have a credit union checking account continues to rise, hitting 53.9% in 2014. Checking accounts are growing faster than membership growth."
The CU system is entering a new era of "reregulation and mass marketing," according to Filson.
"We are seeing an increase in awareness of credit unions by the public, as well as the products offered by credit unions," he said. "We are putting the 'credit' back in credit unions."
As members gain confidence in the economic environment, Filson said the overall CU loan-to-share ratio is back to a more normal range, historically. CUs had $165.6 billion in consumer loans through September, a record.
Filson also suggested there is a "shift" in the CU financial model with a firming environment and more loans on the book. Net interest margin has widened in 2014 as more loans get on the books and rates go up a little bit, he said. "Credit unions are helped by no more assessments coming through, which is helping efficiency. Investment yield is improving as the middle of the curve has picked up."
Total revenue is increasing at CUs for the first time since 2008. Revenue is increasing thanks to interest income, which is offsetting a decrease in non-interest income — which is largely due to lower fee income. Fewer NSF fees are most notable.
ROA is up 80 basis points from one year ago. CUs are seeing net worth and total capital ratios improve.
Meanwhile, Mark McWatters, the newest NCUA board member, is offering a "fresh set of eyes," which Filson said may be a big help to credit unions.
The Hangover
"Regulators have a hangover from the crisis and have not been able to adjust their expectations and resources," Filson noted. "McWatters sees credit unions are no longer operating in crisis mode."
Of note, is credit union capital levels were "very stable" throughout the financial crisis, he added.
CUs have converted to state charters at double the rate of state to federal over the past four years. Filson said this is due to more institutions wanting local access to officials and a diversity of ways of responding to local conditions. "Credit unions are increasingly finding local officials are better able to respond to the new mass market era with flexibility."
CUNA Mutual's Rick concurred that CUs are mostly just looking for the best regulatory environment for their business, but downplayed the conversion trend.
"The numbers are so small that it's not a major trend in my book," Rick said, adding "If you go from one credit union converting to two, you could say that's a 100% increase. The numbers are relatively small, so when you use a percentage change it sounds big."
Looking back at the first nine months of 2014, Filson said the news is "almost universally positive."
"I hope the changes will permeate the regulatory environment in Washington, which is causing the most heartburn for credit unions."
Filson also highlighted strong performance in auto lending, and Rick said CUNA Mutual is forecasting a slight increase for 2015.
"The only concern is that if this pent-up demand [for auto loans] gets satiated earlier than we expect, then that's something to be concerned about," he said. "But if the economy keeps adding over 250,000 jobs per month, which is what we forecast, and consumer confidence continues to rise, we should continue to see probably 17 million cars sold next year, a little faster than the 16.5 million this year."
More Highlights
More highlights from the third quarter include:
- Auto loans continue to recover from the recession, back up to 17.4% of members.
- CUs had double-digit loan growth, led by consumer lending.
- The rising loan-to-share ratio is boosting interest income.
- CUs increased their share of the deposit base in 19 states over the past year. CUs now hold at least 20% of deposits in four states — Vermont, Washington, New Mexico and Alaska.
- Auto lending is the leader in consumer lending as auto sales are strong. The indirect channel was up 23.2% year over year, three times the rate of the direct channel.
- CUs are capturing their highest share of the auto finance market since 2009: 15.7%.
- Credit card balances and number of accounts are at all-time highs. Filson said many CUs that left credit cards during the crisis are getting back in.
— Aaron Passman contributed to this report.
