MADISON, Wis.—Credit union loan balances rose 0.9% in April—greater than April 2016’s 0.7% pace—spurred largely by new auto loan balances rising by a 26.5% seasonally adjusted annualized growth rate, according to CUNA Mutual Group’s latest Trends Report.
CU membership growth, as well, continued its strong pace. In the year to April 2017, credit union memberships rose 4.8% faster than the 3.8% pace set in the year to April 2016, and the fastest pace in in the modern credit union era.
In the year ending in the first quarter of 2017, total credit union loan balances rose 10.8%, slightly faster than the 10.7% pace set for the similar period last year. This has pushed the loan-to-asset ratio to 66.7%, above the 64.4% reported in April 2016. A greater proportion of loans on the balance sheet increased the yield-on-asset ratio 3 basis points to 3.41% in the first quarter, CUNA Mutual Group said.
However, industry average loan growth rates continue to mask big disparities between large and small credit unions. In the year ending in the first quarter of 2017, credit unions with assets greater than $1 billion reported a 12.7% increase in loan balances. Meanwhile, credit unions with assets less than $20 million reported loan growth of only 2.5%.
Credit Union Consumer Installment Credit (CUCIC)
Credit union credit card loan balances grew at a 7.1% seasonally-adjusted annualized growth rate in April, above the credit union 20-year average growth rate of 5.75%, due to rising consumer confidence and sustained job growth. However, credit quality deteriorated somewhat over the last year. Credit card annualized net charge-off rates rose to 2.56% in the first quarter of 2017, up from the 2.20% reported in the first quarter of 2016. Credit union consumer installment credit (auto, credit card and other unsecured loans) grew 12.5% during the last year, more than double the 5.2% for the total market excluding credit unions, Trends Report data shows.
Vehicle Loans
Credit union new auto loan balances’ “remarkable” 26.5% seasonally adjusted annualized growth rate in April occurred largely due to banks tightening credit when faced with auto loan delinquency rates rising above 3% for the first time since 2011, CUNA Mutual said. On a month-over-month basis, new auto loan balances increased 1.9% in April, almost double the 1.0% reported in April 2016. Another factor driving the strong new-auto lending at credit unions is very competitive interest rates; the average interest rate on a credit union four-year new auto loan is 2.70% compared to the bank average of 4.0%, according to DATATRAC, which is a 1.3 percentage point rate advantage for credit unions. Today improving consumer fundamentals are driving strong auto loan growth: an improving labor market, low oil prices, faster wage growth, low interest rates, expanding driving-age population, improving construction activity, and better household balance sheets, CUNA Mutual Group explained.
Vehicle sales rose in April to a 16.9 million seasonally adjusted annualized sales rate – up from a 16.6 million sales pace in March, but 3% below the 17.3 million sales pace set in April 2016. “Expect auto sales to remain around the 17 million pace for the remainder of 2017 before declining to the 16.5 million inherent demand pace in 2018,” CUNA Mutual Group said.
1st Mortgages and Other Real Estate
Credit union fixed-rate first mortgage loan balances fell 0.7% in April, similar to the 0.8% decline reported in April 2016 – the first month of each quarter traditionally reports the weakest growth rate of each quarter, CUNA Mutual said. However, adjustable-rate first mortgage balances rose a modest 0.8%. Adjustable-rate mortgages now make up 29% of all credit union first mortgage loan balances. During the last 12 months, fixed-rate first mortgage balances rose 12.1%, significantly more than the 6% increase in adjustable-rate mortgage balances. Improving household balance sheets, rising consumer incomes and a rising capacity to service debt has decreased mortgage credit risk and, therefore, encouraged credit union lenders to loosen lending standards, CUNA Mutual Group explained.
The contract interest rates on a 30-year fixed-rate conventional home mortgage fell to 4.05% in April, from 4.20% in March, but higher than the 3.61% reported in April 2016. Mortgage interest rates this spring were the highest since the summer of 2014 leading to a drop in refinance activity. The 15-basis-point decrease in mortgage interest rates coincided with an 18 basis point decrease in the 10-year Treasury interest rate, which fell to 2.30% from 2.48% in March. The 18-basis-point reduction in long-term interest rates was caused by a 10-basis-point reduction in real interest rates (due to foreign capital inflows into the U.S.), and a 8-basis-point decrease in inflation expectations (due to stalled fiscal policy).
Single family home prices rose 1.6% in April from March, according to the Core Logic Home Price Index, pushing the index within 1.2% of its all-time high. During the last 12 months home prices rose 6.9%. Home prices are now 49% above the low reached in March 2011. “Improving economic fundamentals bode well for home sales and house price appreciation. The labor market is at full employment with a healthy mix of new jobs. This will spur faster wage and income growth, which will help first-time buyers accumulate sufficient savings for down payments; thus, increasing the demand for housing, boosting home sales and house prices. Supply constraints of new-home construction – in the form of construction worker shortages – will push home prices even higher over the next year,” CUNA Mutual Group said.
Credit union real estate lending will remain robust through 2017 because the fundamental drivers of housing demand are moving in the right direction: strong labor market, rising real weekly earnings, increasing household formation, lower secondary-market down-payment requirements, improving household balance sheets, and rising consumer confidence, CUNA Mutual Group explained.
Surplus Funds (Cash + Investments)
Credit union surplus funds as a percent of assets fell to 29.3% in April, from 31.3% last April, as credit unions’ loans grew faster than investments. During the last year, credit unions added $97.5 billion in loans to their balance sheets, the fastest in credit union history, and $4.3 billion in new investments. The lion’s share was funded with $80.5 billion in new savings deposits. The remainder was funded by $13.8 billion in additional borrowings and $8.8 billion in additional capital (net income), Trends Report data shows.
The yield curve flattened during the last few months (as measured by the difference between the three-year Treasury interest rate and the Fed Funds interest rate) to 57 basis points is due to the Federal Reserve raising short-term interest rates last December and this March, and capital inflows from the rest of world pushing down longer term interest rates. The flatter yield curve caused credit unions to decrease the percentage of surplus funds with a maturity of greater than one year to 50% – down from 53% last December when the yield curve had a steeper slope of 95 basis points.
Savings and Assets
Credit union savings balances fell 0.2% in April, significantly below the 0.9% gain reported in April 2016, due to savings balances in March being artificially high because the month ended on a payroll Friday. April is typically one of the weakest months for savings growth as members use deposits to pay tax liabilities. Seasonal factors typically shave -0.48 percentage points from the underlying savings trend growth, CUNA Mutual Group said.
In the year ending in the first quarter of 2017, credit union savings balances rose 8.4%, significantly above the 6.7% growth rate reported for the year ending in the first quarter of 2016, due to the quarter ending on a payroll Friday and low oil prices resulting in a savings windfall for credit union members. Asset growth accelerated for all asset size categories during the last two years; however, larger credit unions reported faster growth than smaller credit unions.
Capital and Other Key Measures
Credit union return-on-asset ratios averaged 0.71% in the first quarter of 2017, slightly below the 0.75% reported in the first quarter of 2016 and below the long-run average of 1.0%. A 2-basis-point increase in net interest margins (due to a rising loan-to-asset ratio pushing-up the yield-on-asset ratio) were more than offset by a 7-basis-point increase in provision of loan loss expense. However, the credit union movement’s average return-on-asset ratio masks large disparities between large and small credit unions.
The credit union net-charge-off-to-average-loan ratio rose to 0.58% in the first quarter, up from the 0.52% reported in the first quarter of 2016 due to rising credit card charge-offs (2.20% to 2.56%) and rising charge-offs on all other consumer loans (0.82% to 0.92%).
Credit Unions and Members
As of April 2017, CUNA estimates 5,926 credit unions were in operation, 27 fewer than March. During the first four months of 2017, approximately 96 credit unions ceased to exist because of mergers, purchase and assumptions, or liquidation. This rate is slightly slower than the 101 reported during a similar time period in 2016. Expect the annual decline in the number of credit unions to be about 250 per year over the next two years as competitive pressures rise on smaller institutions.
At the end of the first quarter of 2017, 2,405 credit unions reported assets less than $20 million, down from 2,614 one year earlier. These small credit unions make up 41% of all credit unions but control only 0.9% of all credit union loans. Large credit unions enjoy significant economies of scale advantages over smaller institutions. Higher levels of productivity raise the barrier to entry for new credit unions and increase the competitive pressure on smaller credit unions.
Credit union memberships grew a strong 433,000 in April, or 0.39%, up from April 2016 when the movement added 359,000 memberships, an increase of 0.34%. In the year to April 2017, credit union memberships rose 4.8% faster than the 3.8% pace set in the year to April 2016, and the fastest pace in in the modern credit union era. The membership gain was partly driven by the 174,000 new jobs created in April, according to the Bureau of Labor Statistics.
Credit unions should expect membership growth to exceed 3.5% in 2017 and 3% in 2018 as the economic expansion and credit demand continue for the next two years. Most of the membership growth is taking place at credit unions with assets over $1 billion, due to organic growth and mergers. Credit unions with less than $50 million in assets lost memberships during the last two years.
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