Credit unions enjoyed a stellar year in 2015, delivering record-breaking loan and membership growth. The big challenge for 2016: how to build on that momentum.
While it won't be a minor feat to make that happen, credit unions expect mortgage originations to continue helping fuel their growth. Credit unions' share of the first mortgage origination market has been steadily climbing since the beginning of the financial crisis — from 2.6% in 2007 to 8.6% to 8.7% in mid-year 2015, said Mike Schenk, vice president of economics and statistics at Credit Union National Association.
"That momentum is likely to continue, especially if membership growth continues to outpace population growth," he stated.
Further, even as the aggregate origination volume might slip, credit unions should fare better than their competition in the for-profit sector. For 2016, Schenk projects 8.5% to 9.5% growth in credit union first mortgages.
Part of what drove CUs' success in 2015 was the improving economy, declining unemployment and increased disaffection with big banks — and not all of those things are guaranteed to continue in 2016, as the recent stock market tumble can attest.
Plus, even under the best of circumstances, some of last year's numbers would be tough to beat. As of the end of the third quarter of 2015, federally insured credit unions had almost $770 billion in loans outstanding — nearly an 11% spike from the prior year, according to NCUA.
And that growth was across every major loan category, the agency reported. For example, total first mortgage loans outstanding reached $315.5 billion, up 10.2% from the third quarter of 2014. During the same period, new auto loans grew 17.6% to $96.9 billion and used auto loans jumped 13.1% to $158.6 billion.
As for membership, federally insured credit unions counted more than 102 million people, an increase of 3.4 million from the end of the third quarter of 2014.
Can credit unions continue to ride the crest of such prosperity?
"I see no reason to believe the loan and membership growth numbers of 2015 should not increase both in 2016 and for the foreseeable future," said Dennis Dollar, a former NCUA chairman and now a credit union consultant based in Alabama. "[But that is] provided credit unions stay focused on managed growth and the regulatory environment allows such growth to continue within the bounds of safety and soundness."
Jon Jeffreys, managing partner of Callahan & Associates, said credit unions are enjoying strong momentum going into 2016, citing, among other things, that the industry now has a 16.4% share of the auto loan market and 8.7% stake in first mortgage loans.
"From things we have heard from our clients and credit union executives, there is a lot of optimism," he said.
Dan Berger, president and CEO of NAFCU, pointed out that credit unions' loan operations were particularly strong in the spheres of auto loans and first mortgages.
But Berger expects credit unions to do even better in 2016 — largely on the back of an ever-strengthening economy, steady or falling unemployment levels and a still very low interest rate environment (despite the Federal Reserve's recent modest rate hike). "I am expecting credit unions to move more aggressively into HELOCs [home equity lines of credit]," he said. "There is huge potential there."
Dollar commented the loan portfolios of credit unions, despite having a great year in 2015, certainly have not peaked.
"Progressive credit unions with creative and targeted marketing should be able to continue to grow their loan portfolios," he said. "It is quite possible that the next challenge will be to have sufficient liquidity to sustain the loan growth and the cost of the funds to do so."
Dollar sees opportunities galore for credit unions across the loan market. "There are no areas of lending where credit unions have penetrated to the extent that they can pat themselves on the back and say 'mission accomplished,'" he said. "Some individual credit unions may need to adjust their portfolio holdings to make them more balanced in certain categories, but credit unions as a whole still have a lot of good business to pursue in new and used auto lending, credit cards, mortgages, student lending and small business loans."
Where Are the Biggest Opportunities?
In addition to mortgages, auto loans and member business lending are likely to be the "most promising" areas of growth for credit unions in 2016, said CUNA's Schenk.
Rick Odenthal, CEO of Central Minnesota Credit Union, an $895-million institution based in Melrose, Minn., noted that credit unions would be particularly wise to expand their presence in small business lending and micro-loans – areas that the big commercial banks appear to be shying away from.
In addition, Odenthal pointed out that since the onset of the financial crisis, consumers have become more sophisticated, knowledgeable and educated with respect to financial services and products. As a result, he suggested, credit unions need to upgrade their marketing and outreach projects in order to meet this new high standard of consumer knowledge.
"They are not making spontaneous decisions anymore about their financial choices," Odenthal said. "They are doing their due diligence and we need to be able to communicate with them more effectively if we want to be their primary financial institution."
Odenthal suggests credit unions meet personally with members in order to plan out in detail what kinds of loans they want and need and what kind of retirement assets they would be comfortable with.
Jeffreys of Callahan suggested that credit unions need to market themselves more to the public — particularly to people who know little or nothing about credit unions.
"The terms 'financial health' and 'financial literacy' are key in this discussion," he said. "Credit unions are now uniquely positioned to promote how they differ from banks; that is, the way they offer lower rates and more financial counseling, etc. It's not so much that people need more loans — more importantly, they need to get out of debt; and credit unions should emphasize more how they can help people do exactly that."
That education initiative, Jeffreys believes, could serve as a powerful catalyst for further growth for credit unions.
Don Crofut, CEO of South Metro Federal Credit Union, a $98-million institution based in Prior Lake, Minn., a suburb of Minneapolis-St. Paul, also said that a key part of any credit union's ongoing strategy should be the "financial education" of their membership.
"There is a lot of value in financial education and counseling to both our members and the credit union itself," he said. "By improving and maintaining sound financial health, members can better weather the ups and downs of the overall economy."
Headwinds On The Horizon?
But there may be some dark clouds ahead for the credit union movement.
Berger thinks the principal threat to credit union growth in 2016 might come from the other side of the world — China, whose stock market has plunged, triggering economic fears across the globe. If China's economy continues to weaken, that could potentially pose a threat to U.S. markets and, ultimately, consumer spending.
Jeffreys also cautioned that credit unions may increasingly face competitive threats from the newly emerging plethora of fintech and online marketplace lenders. Though it is questionable to what degree these would-be disruptors actually do offer faster turnaround times, more ease of use, better convenience and higher approval rates than do traditional financial institutions, that is the perception that credit unions are battling.
"I think credit unions could learn some things from these companies," Jeffreys said. "They might try to see what parts of their business model and operating procedures that credit unions could adopt."
And there is at least one exterior factor that Crofut is concerned about — regulatory headwinds coming out of Washington.
"That is something that we have to continually look out for and prepare for," he said. "Complying with continuing regulations is something that all credit unions need to deal with."
Credit unions now have well in excess of 100 million members in the U.S. after yet another annual increase. However, Berger does not believe CU membership is anywhere close to "peaking."
"What's the total population of the U.S.," he asked rhetorically. Answer: the U.S. Census Bureau was projecting the population to be at more than 320 million as of Jan. 1. "There's a lot of room for upside."
Berger posits new credit union membership will primarily come from millennials, Generation Y, as well as consumers who have become disenchanted with the commercial banks.
"I think increasing portions of the public sees us [credit unions] as wearing the 'white hats' and banks adorning 'black hats,'" he observed. "I expect even more people to move their accounts from banks to credit unions — which offer lower rates and more direct, personal service."
As part of this strategy to maintain the momentum of membership growth, Berger of NAFCU said credit unions must continue to invest in technology and aggressively market to various demographic segments, particularly the young, who have grown up amidst a technological boom and demand rapid tech upgrades from their financial institutions.
The good news, Jefferys said, is that all the work credit unions have been doing to reach out to the younger demographic hasn't been for naught. Over the past decade, he said, the average age of a credit union member has remained essentially flat, in the early 40s. While that may not sound like a success story, Jefferys said it is. "What this suggests is that credit unions have successfully attracted younger members consistently over the past decade," he said, because otherwise, that number would continue to age up along with the membership.
But for all of that focus on new members, Odenthal said credit unions cannot lose sight of the growth opportunities to be had among their existing members, suggesting CUs concentrate more on improving the quality of service to those already in the CU fold.
"That alone would improve our relationships with our members, and that, in turn, would lead to increased membership, through their friends and families," he said, not to mention getting more business with those existing members.