MADISON, Wis.–Home affordability will worsen over the next few years, interest rate increases will restrain overall CU loan growth, and there are questions over how “sticky” many of the deposits in credit unions are, according to the new CUNA Mutual Trends Report, which also found CU membership growth slowed during the first quarter of 2022.
The May Trends Report is based on data through March of this year.
Below is a look at how credit unions performed by category, as well as a number of category-specific forecasts:
Total Credit Union Lending
Credit union loan balances rose 1.6% in March 2022, above the 0.1% reported in March 2021 and 11.3% during the last 12 month, the Trends Report stated,
“March is historically the 3rd weakest loan growth month of the year, with seasonal factors typically shaving off 0.24 percentage points from the underlying trend growth rate. The lending season for credit unions begins in earnest in April and continues through August,” CUNA Mutual’s Economist Steve Rick pointed out. “Driving overall loan growth was strong growth in used-auto loans (2.1%) and fixed-rate first mortgages (1.9%). Home equity loan growth accelerated recently with March posting growth of 0.9% and year-over-year growth of 10.9%.
As for how rising short-term interest rates will affect credit union loan growth, Rick noted the chart shows the relationship between credit union annualized loan growth numbers and the Fed Funds interest rate for the past 24 years.
“Periods of rising Fed Funds interest rates, (1999-2000, 2004-2006 and 2017- 2019) have a restraining effect on overall credit union loan growth,” the report states. “For every one percentage point increase in the Fed Funds rate, credit union loan growth typically slows by 1.75 percentage points. This is, of course, the goal of restrictive monetary policy, which is to lower the rate of credit creation from above-trend growth to something closer to normal. Credit union annualized and seasonally adjusted loan growth is currently running at 16.4%, significantly above its long-run average of 7%.
Expect credit union loan balances to rise 12% in 2022 and then slow to 9% in 2023 and 7% in 2024 as the Fed Funds interest rate reaches 3.25% at the end of 2023.”
Consumer Installment Credit
Credit union consumer installment credit balances (auto, credit card and other unsecured loans) rose 1.4% in March 2022, above the 0.3% pace set in March 2021, due to strong growth in used- auto lending (2.1%), according to the Trends Report.
Credit card balances rose 0.9% in March, despite seasonal factors that typically shave 1.23 percentage points from the underlying trend growth as members use tax refunds and bonuses to pay down outstanding credit card balances, the analysis states.
Over the last year, credit union credit card loan balances rose a strong 9.6%, above the 30-year long run pace of 7%, as members began spending more on travel and leisure as the pandemic loosens its grip on consumer behavior, the report added.
Credit union consumer installment credit grew 2.4% year to date, significantly above the 1.6% pace set in the first quarter of 2021, the analysis notes, while credit union consumer installment credit grew 8.7% during the last year, which is slightly below the 9.8% for the total market excluding credit unions and government student loans.
Vehicle Loans
Credit union new-auto loan balances rose 1.2% in March 2022; a “big jump” compared to the 1.7% drop in March 2021.
“New-auto loan balances are up 3.7% from one year ago and used-auto loan balances are up 13.5%. The new-auto buying and lending season begins in May and runs through October,” the Trends Report states. On a seasonally-adjusted annualized growth rate basis, new-auto loan balances rose 8.7% in March, as loan originations are exceeding loan payoffs.
“…If you factor in the drop in vehicle incentives and rising interest rates, then the rise in new vehicle payments has increased by over 30% during the past two years,” the Report continues. “We expect auto loan interest rates to rise to the highest level in over a decade by the end of 2022 as the Federal Reserve pushes short-term market interest rates over 2.25%.”
Real Estate Information
According to the Trends Report, credit union fixed-rate first mortgage loan balances rose 1.9% in March 2022, above the 1.4% increase reported in March 2021, as mortgage interest rates began to rise.
Credit union fixed-rate first mortgage loan balances, meanwhile, rose 17.9% over the last 12 months, above the 14.1% pace set for a similar period last year. Home equity loan balances rose 10.9% due to strong home price appreciation, while second mortgage balances fell by 8.8% over the last year as members rolled these loans into refinanced low-rate first mortgage loans, the Report added.
“The shortage of new homes is due to homebuilders not producing enough new inventories to satisfy demand,” the analysis states. “The sharp rise in mortgage interest rates since the start of the year will slow price appreciation for the next few years as housing affordability worsens.”
Savings & Assets
Credit union savings balances surged 1.8% in March 2022, but below the large 4.2% gain reported in March 2021 when $1,400 stimulus checks were deposited in many members’ share draft accounts, the Report observes.
“Seasonal factors like tax refunds and bonuses typically get deposited in credit union members’ share draft and regular share accounts, which increased by 2.8% and 2.2%, respectively,” Rick continued in his analysis. “ March’s seasonal factors typically add 1.2 percentage points to the underlying savings trend growth, making it the second-biggest month of the year for credit union savings growth. In percentage terms, per-member savings balances rose 5.4% during the last year, slightly below its long-run average of 5.5%.”
The Trends Report further notes the average credit union member had $14,166 in total savings deposits in March 2022, up from $11,307 in March 2020.
“This $2,859 jump in savings balances (a 25.3% growth rate) is the biggest in credit union history and is due to a combination of stimulus checks, enhanced unemployment insurance benefits, and less spending on services due to fear and uncertainty caused by the COVID-19 pandemic,” the analysis states. “The big question going forward is how ‘sticky’ will these additional deposits be? Will credit union members keep the additional $1,581 as a savings cushion, will they spend those funds, or will they pay down debt?”
Capital & Other Key Measures
The credit union’s average capital-to-asset ratio fell to 9.2% in March 2022, down from 9.8% in March 2021, according to the Trends Report analysis.
In the year ending in March 2022, credit union capital rose only 1.5% while assets grew 8.4%, which decreased the capital ratio by 0.6 percentage points and 6%, the approximate difference between the numerator and denominator growth rates.
Credit union “net capital” (aka equity) is defined as the sum of reserves plus undivided earnings plus gains divided by losses on available-for-sale securities, according to the Trends Report.
“During the first quarter, rising market interest rates reduced the value of available-for-sale securities and the dollar amount of credit union equity fell to $11.3 billion, from $209.2 billion in December 2021 to $197.9 billion in March 2022,” the Report notes. “Over the last 12 months, credit unions have taken on more interest rate risk by increasing their percent of investments in maturities greater than one year from 43% to 53% today.”
Delinquencies
The credit union loan delinquency rate (loans two or more months delinquent as a percent of total loans outstanding) fell to 0.43% in March 2022, down from 0.49% in December 2021, and down from 0.46% in March 2021, the Report states.
“Credit unions normally report large declines in the delinquency rate in February and March as members use bonuses and tax refunds to catch up on overdue loans,” Rick stated. “With the unemployment rate expected to slowly rise and approach 4.5% over the next few years, we can expect the credit union loan delinquency rate to also rise to its long-run natural delinquency rate of 0.75%.”
Credit Unions & Membership
Credit union membership growth slowed in the first quarter of 2022, adding 0.507 million new memberships, slightly slower than the 1.4 million added in the first quarter of 2021, according to the Trends Report.
On a growth rate basis, memberships are up 4.4% in the year ending in March 2022, equal to the 4.4% pace set in the year ending in March 2021, the Report added.
“The membership growth was partially driven by the 1.646 million jobs gained in the first quarter, according to the Bureau of Labor Statistics, which is below the 1.934 million jobs gained in the first quarter of 2021,” the analysis states. “Credit unions should expect membership growth of around 4% in 2022, and a similar 4% membership growth is forecasted for 2023.”
Consistent with recent trends, the Report notes most of the membership growth is taking place at credit unions with assets greater than $1 billion due to organic growth and mergers.
“These large credit unions reported membership growth in the 6% range. Credit unions with assets in the range of $250- 999 million reported membership growth of around 2% for the last two years,” the Report states. “Credit unions with less than $100 million in assets lost memberships during the last two years.”