MADISON, Wis.—Credit union loan balances rose 1% in June, slower than the 1.2% pace reported in June 2016, due to slower growth in used-auto loans (0.3% vs 1.3%) and adjusted-rate first mortgages (-2.2% vs -0.8%), according to CUNA Mutual Groups latest Trends Report.
June typically records the fastest loan growth of the year, with seasonal factors adding 0.42 percentage points to the underlying trend growth, CUNA Mutual said. Credit union loan balances grew at a 10.9% seasonally-adjusted, annualized growth rate in June, similar to the pace set over the last three years. There are numerous factors that will drive double-digit loan growth through 2017. The most important one is job growth, CUA Mutual stated. The economy is expected to add close to 2.3 million jobs in 2017 and 2.1 million in 2018. As the labor market reaches full employment in the second half of 2017, wage growth will accelerate, giving members increased ability to borrow. But this will also raise consumer confidence, increasing members’ willingness to borrow, the company said.
Credit Union Consumer Installment Credit
Credit union consumer-installment-credit loan balances (auto, credit card and other unsecured loans) rose 12.4% during the 12 months ending in June, more than twice the 5.3% reported by all other lenders. Credit cards came in surprisingly strong in June, growing at an 8.9% seasonally-adjusted annualized growth rate. June’s seasonal factors usually add 0.58 percentage points to the underlying trend growth rate. Low gas prices had been weighing on credit card growth by reducing the amounts charged on credit cards and increasing the savings available to pay down outstanding debt. Moreover, rising consumer confidence is encouraging members to start borrowing and buying again, the report stated.
Vehicle Loans
Credit union used-auto loan balances grew at a 12.1% seasonally-adjusted, annualized growth rate in June, a deceleration from the pace set during the last couple of years. March through August is considered the used-auto buying and lending season. Credit union used-auto loan balances are generally 62% larger than new-auto loan balances, but a typical used-auto loan is originated at roughly half the dollar amount of a new-auto loan.
Vehicle sales rose in June to a 16.8 million unit seasonally-adjusted, annualized sales rate, which is up from the 16.7 million units reported in May, but down 5.9% on a year-ago basis. This is still above the 16.5 million-level considered a strong auto market. New-auto sales headwinds include lenders tightening credit standards, a surplus of used cars and falling pent-up demand.
Real Estate Secured Lending – 1st Mortgages and Other Real Estate
Credit union fixed-rate first mortgage loan balances grew 2.7% in June, faster than the 2.2% reported in June 2016. A year-to-date growth comparison shows a 4.8% growth rate during the first half of 2017 compared to 4.3% during 2016. Adjustable-rate first mortgage loan balances reported basically zero growth during the first half of 2017, down from 3.7% during the similar period last year. Credit unions now hold $373.8 billion of first mortgages on their books, which are 3.9% of the entire mortgage market, up from 3.6% in June 2016. All credit union real estate loans grew 8.6% over the last year, similar to the same pace set in 2016.
The contract interest rate on a 30-year fixed-rate conventional home mortgage fell to 3.9% in June, down from 4.01% in May, but above the 3.57% reported in June 2016. “We expect the Federal Reserve to raise short-term interest rates in the second half of 2017, which will lift the 30-year mortgage interest rate to the 4.0-4.25% range by the first half of 2018. This forecasted increase in interest rates will encourage some fence-sitters to purchase a home now before interest rates rise further,” CUNA Mutual stated.
Home prices rose 1.1% in June from May, according to the CoreLogic Home Price Index, and 6.7% year-over-year. The index has now posted more than five years of positive year-over-year growth rates. The index is expected to surpass the record high set in April 2006 in July. Home prices are expected to rise another 6% in 2017 and 5% in 2018.
Existing home sales fell 1.8% in June compared to May, but up 0.7% compared to June 2016. The housing market remains constrained by a limited supply, with only 4.3 months’ supply of homes on the market. The return of first-time homebuyer sales could herald stronger demand for home purchases in coming years, CUNA Mutual said. Credit union mortgage lending should increase as improving financial positions among borrowers and rising incomes justify loosening credit standards. In addition, confidence in the housing market is rising as the general economy strengthens and lingering memories of the most recent housing downturn fade from view.
Surplus Funds (Cash + Investments)
Credit union surplus funds as a percent of assets fell to 28.1% in June, down from 29.8% in June 2016, as surplus funds grew 1.6% over the last year while assets grew 7.8% . This measure of credit union liquidity is the tightest since January 2009. The strong growth in savings over the last year resulted in credit unions relying less on wholesale borrowings, which declined by $4.7 billion. Credit unions’ capital balances increased by $7.8 billion during the last 12 months. The credit union movement’s capital-to-asset ratio fell to 10.6%, slightly below the 10.8% reported in June 2016, due to a surge in deposits caused by the month ending on a payroll Friday.
The obverse of the falling surplus funds ratio is the rising loan-to-asset ratio, which reached 67.7 in June, the highest level since February 2009. Credit unions can expect rising asset yields over the next year as more and more funds are moved from the investment portfolio into new- and used-auto loans and additional mortgage lending, the report stated.
During the month of June, credit unions added $9.2 billion in loans and $1 billion in investments to their balance sheets, and paid down $11 billion in borrowings by gathering $16.3 billion in new savings and accumulating $1 billion in earnings.
Savings and Assets
Credit union savings balances grew 8.6% during the 12 months ending in June, significantly faster than the 6% average annual growth rate recorded during the last 10 years due to the month ending on a payroll Friday. This strong savings growth rate was caused by the combination of fast membership growth, 4.6% during the last 12 months, and rising savings-per-member growth, 4.1% during the last year. The savings-per-member growth rate picked up during the last two years as a result of falling gas prices and households deciding to save rather than spend this windfall. Meanwhile, the membership growth rate rose due to faster job growth and rising demand for credit union loans. If households come to expect the fall in gas prices to be more permanent than temporary, they will begin to spend the gas dividend windfall, which will dampen credit union savings growth rates in 2018, the report stated.
Capital and Other Key Measures
The yield curve has flattened significantly since the beginning of year, which will put downward pressure on credit unions’ net interest margins during the remainder of 2017. In June, the Federal Reserve raised the Fed Funds interest rate 0.25 percentage points, raising short-term interest rates, and with some delay, credit union cost of funds. Worries over political dysfunction in Washington and uncertainty over the timing and amount of tax reform and infrastructure spending reduced longer-term interest rates. This will keep downward pressure on credit union yield on assets, the company said.
Credit union loan-to-share ratios rose to 79.6% in June, up from 78.1% one year earlier. The recent cyclical high of 84.1% occurred during September 2008, nine months after the start of the Great Recession. Loan-to-asset ratios reached 67.7% in June, the highest since February 2009, which will buoy net interest margins and offset the downward pressure on margins caused by the flattening yield curve.
Credit Unions and Members
As of June 2017, CUNA estimates 5,911 credit unions were in operation, 11 fewer than May and 215 fewer than June 2016. During the first half of 2017, approximately 111 credit unions ceased to exist because of mergers, purchase and assumptions, or liquidation. During a typical year, 46% of the total decline in the number of credit unions takes place in the first half of the year, which means we can forecast the 2017 full year decline in the number of credit unions to be 241, slightly above the 214 reported in 2016. The average asset size of a credit union now stands at $231.4 million, up 12% from a year ago, while the median asset size is $30.3 million, up 9% over the last year, indicating larger credit unions growing faster than their smaller counterparts.
The trend towards industry consolidation and bigger credit unions is only likely to accelerate due to the benefits of greater economies of scale, higher productivity and larger earnings that are all achieved with a larger asset base. Larger, more efficient credit unions will also raise the barrier to entry for new small credit unions, CUNA Mutual said.