MADISON, Wis.—First mortgage loan balances, which have buoyed CU balance sheets during the health crisis, finally showed some signs of weakness in October, while CU membership growth really slowed down during the same month.
CUNA Mutual Group’s latest Trends Report reveals fixed-rate first mortgage loan balances, which grew at a strong 14.8% over the last year, declined slightly in October by 0.3%.
The report also forecasts total mortgage lending will decline by 25% in 2021, but home equity lending might pick up some of the slack next year.
Meanwhile, credit union memberships grew by a modest 47,000 in October, or 0.04%, much slower than the 252,000 new members, or 0.21%, added in October 2019.
Here’s a look at how credit unions performed by category:
Credit Union Consumer Installment Credit (CUCIC)
Credit union consumer installment credit balances (auto, credit card and other unsecured loans) reported 0.4% growth in October, more than the 0.1% increase set in October 2019, due to an acceleration in the “other loans” category, according to the Trends Report.
During the last 12 months, credit union consumer installment credit grew only 2.5%, which is above the rest of the market excluding credit unions, which decreased 0.3%. For all lenders, outstanding consumer credit rose a modest $7.3 billion in October, according to the Federal Reserve, which is half the $14.7 billion average monthly growth reported during the years 2015-2019, the Trends Report added, noting the decrease in the Fed Funds interest rate will decrease credit card interest rates in the near term and, to a lesser extent, auto loan rates.
“This will lower credit union yield on assets and net income in 2021,” CUNA Mutual said.
Vehicle Loans
Credit union new auto loan balances rose 0.1% in October, up from the 0.4% decline seen in October 2019, but have decreased 3.8% during the last year. On a seasonally-adjusted annualized basis, new auto loan balances fell 8.1% in October, even lower than the 1.3% pace reported in October 2019, CUNA Mutual said.
“Multiple factors are driving the slowdown in new auto loan growth: COVID-19 pandemic/economic uncertainty, the mortgage refinance boom and more aggressive marketing by banks. The number of new auto loans as a percent of members in offering credit unions – the penetration rate – fell to 6.1% in the third quarter, down from 6.3% last year, but up from and 4.6% in 2014,” the report stated.
Vehicle sales rose 3.5% to 17.2 million units in October on a seasonally-adjusted annualized sales rate, up from the 16.6 million reported in September. October sales were 1% above the October 2019 rate and well above the 13.9 million average reported so far this year.
Real Estate Secured Lending – First Mortgages and Other Real Estate
Credit union fixed-rate mortgage lending was firing on all four cylinders during the last 12 months due to the 85 basis point drop in mortgage interest rates, CUNA Mutual Group said.
Fixed-rate first mortgage loan balances grew a strong 14.8% over the last year but declined slightly in October by 0.3%. Second mortgage loan balances fell 14.4% over the last year and 3% during October as members used cash from a mortgage refinance to pay off second mortgage loans, according to the report.
“Expect purchase mortgage lending to increase 12% in 2020 due to rising incomes, rising consumer confidence and modest job growth,” CUNA Mutual forecast. “However, expect refinance mortgage lending to drop 50% as 30-year mortgage interest rates rise from around 2.75% today to over 3.5% by the end of 2021. Thus, total mortgage lending is expected to decline by 25% in 2021.”
Home equity lending balances rose a modest 1.1% in October, up from the 0.8% reported in October 2019. During the last 12 months, home equity balances fell 3.1% due to the mortgage refinance boom leading some members to cash out some equity from their homes to pay off higher rate home equity loan balances, according to the Trends Report.
“Home equity loan balance growth will recover in 2021 as the mortgage refinance boom comes to an end and home prices continue to rise,” the report stated.
The contract interest rate on a 30-year fixed-rate conventional home mortgage fell to 2.83% in October, from 2.89% in September and below the 3.69% reported in October 2019.
Surplus Funds (Cash + Investments)
Credit union surplus funds rose in October by $31 billion due in part to a $27 billion surge in deposit growth outpacing a $0.4 billion increase in loans. Borrowing fell $2.2 billion due to credit unions swimming in excess liquidity. Credit union surplus funds as a percent of assets rose to 31.9% in October, up from 24.7% in October 2019, to reach a record high of $591 billion, according to the report.
“We expect the credit union liquidity position to increase further in 2021 as deposit growth continues to outpace loan growth,” CUNA Mutual Group said.
As the Federal Reserve lowered the Fed Funds interest rate 2.3% since August 2019, the yield curve has pivoted from being inverted to flat or sloping slightly upward, CUNA Mutual’s economists said.
“We can measure the slope of the yield curve by the difference between the 3-year Treasury interest rate and the Fed Funds interest rate,” the report’s analysis states. “Inverted to flat yield curves historically induce credit unions to reduce the percent of surplus funds invested with maturities greater than one year. With the Federal Reserve now paying 0.1% on required and excess reserve balances held at the Fed, and the 3-year Treasury rate trading at only 0.22%, many credit unions are parking excess funds in their Fed reserve account to maintain liquidity in anticipation of future deposit withdrawals.”
Savings and Assets
Credit union savings balances rose in October by 1.7%, greater than the 0.7% rise in October 2019. Savings balances grew at an 20.7% seasonally-adjusted annualized growth rate in October, above the 13.7% reported one year earlier.
Credit unions are experiencing a pickup in deposit growth due to the drop in consumer spending caused by the COVID-19 pandemic and lower spending on gasoline. The personal savings rate (personal savings as a percent of disposable personal income) rose to 14.4% during the last few months from 7.3% in October 2019,” CUNA Mutual said.
“We expect credit union deposit growth to remain strong in 2021, possibly over 8% which is above the long run average of 7%,” the report states.
Capital and Other Key Measures
CUNA Mutual noted the credit union system has become “significantly more productive over the last 20 years. Back in the year 2000, it took on average 0.38 full time credit union employees to manage every $1 million in assets. Today that ratio stands at 0.17, a 55% improvement in productivity overall or 2.8% increase in productivity per year.”
“Today there are 313,349 full-time employees working at credit unions managing $1.8 trillion in assets. The number of employees working at credit unions today would have been 691,600 (0.38 x 1,820,000) if credit union employees had the same level of productivity that they did back in 2000. The net result is that 378,251 (691,600 – 313,349) employees were not needed due to improvements in human and physical capital,” the report continued. “Smaller asset size credit unions reported bigger improvements in productivity ratios over the last 20 years; however, larger credit unions are still more productive due to their economies of scale.”
The Trends Report found credit union capital balances grew 8% in the year ending in October, above the 7% average set over the last 20 years.
Credit Unions
As of October 2019, CUNA estimates 5,336 credit unions were in operation, down 167 from October 2019. Year-to-date the number of credit unions fell by 124, slightly more than the 100-decline reported in the first ten months of 2019.
“We expect a surge in credit union mergers in the 2022-2024 period, like what we experienced the years following the Great Recession,” CUNA Mutual is predicting.
Credit union consolidation and concentration is expected to continue at its long run pace in 2021. Since 1980, the number of credit unions has declined by roughly 3.5% each year, the report added.
“If we apply this exponential ‘decay’ rate to the current number of credit unions, 5,336, we should expect another 187 credit unions to exit the financial system in 2021,” CUNA Mutual stated. “If we forecast out a little further, according to the laws of exponential decay, there will only be 2,617 credit unions in operation in 20 years, half as many as there are today. Fortunately, credit union assets follow an average annual exponential growth of 7%. This means the time that it takes for credit union assets to double (currently $1.820 trillion) is only 10 years.”
Credit Union Membership
Meanwhile, Credit union memberships grew by a modest 47,000 in October, or 0.04%, much slower than the 252,000 new members (0.21%) added in October 2019, according to the Trends reported.
“Year-to-date credit unions added 2.88 million new members, slower than the 3.67 million members added during the similar period in 2019,” CUNA Mutual said. “October’s seasonal factors typically shave off 0.23% from the underlying trend membership growth rate.
According to the report, total credit union memberships reached 125.7 million in October, 2.8% more than October 2019 and the slowest pace since the fall of 2014.
“Expect membership growth to accelerate to 3% in 2021 as loan growth picks up speed,” CUNA Mutual is forecasting.