MADISON, Wis.–Lending might have been up at credit unions through May, but it was down significantly from one year earlier, while the drop in savings per member was the largest in credit union history, according to TruStage’s newest Trends Report.
The July report, which is based on data through May, also found the disparity between small and large credit unions’ return-on-asset ratios decreased significantly over the last year, while CU membership gains have slowed even as overall membership is expected to top 141 million by the end of this year.
Here’s a look at how credit unions performed through May by category:
Total Credit Union Lending
Credit union loan balances rose 0.6% in May, much slower than the 2.1% pace reported in May 2022 and 14.5% during the last 12 months due to a consumer spending rebound post pandemic,” the Trends Report states. “Every loan category, except for used-auto loans, reported positive growth rates in May, with adjustable-rate mortgages leading the way reporting 2.6% monthly growth.”
According to the Trends report, member business loans made up the lion’s share of loan growth over the last five months.
“Since the end of 2022, credit union member business loans increased $29.4 billion, while home equity/second mortgage loan balances rose $11.8 billion as consumers took advantage of the recent surge in home prices to borrow against their home,” the Trends Report said.
First-mortgage loan balances have declined by $5.2 billion year to date as originations have been lower than repayments. Higher yielding unsecured and credit card loan balances made up only 9.2% of all loan balances in May, close to the lowest in credit union history, according to the report.
“This is one of the factors slowing the rise in credit union yield on asset ratios this year,” the Trends Report said. “Expect slower loan growth for the 2nd half of 2023 and into 2024 as the labor market cools and interest rates rise further.”
Consumer Installment Credit
Credit union consumer installment credit balances (auto, credit card and other unsecured loans) reported an increase of 0.05% in May, below the 2.3% increase set in May 2022, due to a deceleration in new and used auto loans, according to the TruStage analysis.
It further notes that during the last 12 months, credit union consumer installment credit grew 13.9%, which is below the total credit union loan growth of 14.5%. Credit union consumer installment credit grew faster than the rest of the market excluding credit unions, which increased 5.1% over the last year, the report added.
For all lenders, outstanding consumer credit rose $7.2 billion in May, according to the Federal Reserve, falling well short of expectations for a $20.5 billion. With a $1.3 billion decrease, nonrevolving credit accounted for an outsized share of May’s slowdown while revolving credit expanded $8.5 billion.
“Consumer credit is expected to slow for the next 12 months due to higher interest rates and tighter lending standards,” according to TruStage. “Continuing liquidity issues at financial institutions will also slow credit creation. Somewhat offsetting these factors will be continued demand for travel, pent up demand for autos and a healthy labor market. This will ensure loan growth will expand but just at a slower pace than the last year.”
Vehicle Loans
Credit union new-auto loan balances rose 0.02% in May, a big drop compared to the 1.7% gain reported in May 2022, the Trends Report shared.
“Higher interest rates and increased competitive pressure from captive finance companies has reduced new-auto lending at credit unions. On a seasonally-adjusted annual rate new-auto loan balances rose 8.9% in May the slowest pace since the fall of 2021,” the report added. “The month of May is historically the beginning of the new-auto lending season, so we expected a credit union lending turnaround. New-auto loan balances rose 1.1% year to date, significantly below the 8.2% jump reported during the first 5 months of 2022.
“Expect new auto sales to remain below its long run average of 16.5 million sales pace for the remainder or the year due to higher interest rates and high prices,” the report forecasts.
Real Estate Information
According to the TruStage analysis, credit union fixed-rate first mortgage loan balances rose 0.2% in May, below the 2.1% increase reported in May 2022.
The report further noted:
- Credit union fixed-rate first mortgage loan balances fell 4.1% at a seasonally-adjusted annual rate in May, the biggest decline in credit union history.
- Adjustable- rate first mortgage balances rose 2.7% in May, better than the 1.5% increase reported in May 2022, and have increased 37% during the last year.
- Credit union home-equity loan balances rose 25% at a seasonally-adjusted annual rate in May, down slightly from the record setting pace of the last year. (see figure below).
Fixed-rate first mortgages now make up 29.1% of all credit union loan balances, down from the record high 36.4% set in December 2021, according to the Trends Report.
“Interest rate risk has become a major concern as market interest rates rose over the last 16 months,” the analysis states. “Lower fixed-rate mortgages as a percent of all loans will reduce some of this risk.”
Savings & Assets
Credit union savings balances fell at a 1.5% seasonally-adjusted, annualized growth rate in May, significantly below the 4.2% pace set in May 2022, the Trends Report noted.
“The deposit growth slowdown was caused by increased member spending and funds leaving credit unions for alternate savings products paying higher interest rates,” the analysis states. It further notes savings per member fell 2.7% during the last year (see figure above), from $13,985 in May 2022 to $13,604 in May 2023.
“This $381 drop in savings per member is the largest in credit union history. The fastest increase in short-term interest rates in over 40 years is the proximate cause of this deposit runoff,” according to the Trends Report. “Credit union share certificates deposit accounts grew 60.3% during the last year ($147 million) as members moved $67.4 million from money market accounts, $59.5 million from regular share accounts, $11.8 million from share draft accounts and the remainder coming from new deposit inflows.”
The TruStage analysis found the growth in high-interest-rate deposits raised credit unions’ average cost of funds to 1.05% in the first quarter, up from 0.35% in Q1 2022.
“With the Federal Reserve expected to raise rates by another 50 basis points this year, expect this shift in the mix of deposits to continue,” the report predicts.
Capital and Other Key Measures
The credit union loan delinquency rate (loans two or more months delinquent as a percent of total loans outstanding) rose to 0.73% in May, up from 0.72% in April and from 0.46% in May 2022, according to the Trends Report.
Delinquency rates are below the 0.75% long-run natural delinquency rate, due to the unemployment rate of 3.6% being below the natural unemployment rate of 4.5%.
“Credit union loan net charge offs as a percent of average loan balances rose to 0.52% in the first quarter of 2023, up from 0.28% in the first quarter of 2022,” according to the report. “This charge off rate is slightly above the long-run average charge off rate of 0.50%. Credit union asset quality is expected to deteriorate as the Federal Reserve raises interest rates and slows the labor market.”
Additional findings included:
- Credit union return-on-assets ratios fell to 81% in the first quarter of 2023, down from 0.87% in Q1 2022, due mainly to rising cost of funds (105 basis points in Q1 2023 versus 35 basis points in Q1 2022).
- Provisions for loan loss jumped to 40 basis points in Q1 2023 from 14 basis points one year earlier.
- The disparity between small and large credit unions’ return-on-asset ratios decreased significantly over the last year as smaller credit unions generally reported an increase in ROA while larger credit unions reported a decline.
Credit Unions & Members
According to the Trends Report, credit union memberships grew 204,000 in May, or 0.15%, down from May 2022 when the movement added 451,000 memberships at an increase of 0.34%. The membership gain year-to-date slowed to 1.197 million, down from 2.525 million for the similar period in 2022.
“Credit union memberships grew 4.35 million during the year ending in May 2023,” the report stated. “Total credit union memberships have surpassed 138.9 million and are expected to reach over 141 million by the 4th quarter of 2023. Robust loan growth and strong job creation are two factors boosting credit union membership growth.”
The report further noted credit union memberships grew at a 2.0% seasonally-adjusted, annualized growth rate in May, slower than the record-setting 4.5% pace of the last few years.
“The current pace is however like the 2.5% pace that began after Bank Transfer Day on November 5, 2011,” the report said. “Expect credit union memberships to grow 2.5% in 2023 and 2024.”
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