MADISON, Wis.–Loan volume remains robustly steady at credit unions, while more than 400,000 new members joined a CU during July. At the same time, reports CUNA Mutual’s latest Trends Report, the pace of credit union consolidation has slowed considerably.
But in what has become a common refrain, the Trends Report data, which reflects CU performance through July, is largely a tale of “averages” that do not reflect the lagging performance at many small CUs.
Among the findings in the Trends Report, which is based on CUNA data:
Total Lending
Credit union loan balances rose 1% in July, equal to the 1% pace reported in July 2015, and 5.5% year-to-date. July’s seasonal factors usually add 0.32 percentage points to the underlying trend growth rate, CUNA Mutual said.
In the year ending in the second quarter of 2016, total credit union loan balances rose 10.5%, according to NCUA call report data. This is the third year of double digit loan growth. The credit union movement’s loan-to-asset ratio now stands at 65.7%, above the 64.1% reported in June 2015, and the highest since July 2009. A greater proportion of loans on the balance sheet during the last year increased the yield-on-asset ratio 4 basis points to 3.37% in the second quarter of 2016.
Once again, CUNA Mutual reported that industry average loan growth rates mask big disparities between large and small credit unions. In the year ending in the second quarter of 2016, credit unions with assets greater than $1 billion reported a 12.3% increase in loan balances. Meanwhile, credit unions with assets less than $20 million reported loan growth of only 2.8%.
Credit Union Consumer Installment Credit (CUCIC)
Credit union consumer installment credit loan balances (auto, credit card and other unsecured loans) rose 1.4% in July, the same pace set in July 2015. During the last 12 months, credit union consumer installment credit grew 10.9%, about twice as fast as the total market, CUNA Mutual said.
Vehicle Loans
Credit union new-auto loan balances rose 1.4% in July, above the 1.3% pace set in July 2015. Currently, new-auto loan balances are rising at a 15.2% seasonally-adjusted annualized growth rate, which is down from the record, and frankly unsustainable, 22.4% pace set in the summer of 2014, according to CUNA Mutual’s analysis.
Real Estate-Secured Lending – 1st Mortgages and Other Real Estate
Credit unions originated a record $63.3 billion in the first half of 2016, a 3.3% increase over the $61.4 billion in originations in the first half of 2015, the Trends Report states. Credit unions then proceeded to sell off 38% of those originations into the secondary market, a lower percentage than the 39% in 2015. The stage is set for another strong year of credit union first mortgage growth as rising purchase activity offsets slower refinance business, CUNA Mutual said.
Credit unions originated $14.2 billion of home equity and second mortgages in the first half of 2016, a 20% increase from the same time period last year. Credit unions now hold $422 billion of total real estate loans (first and second mortgages) on their books, which are 4.4% of the entire mortgage market, up from 4.1% in June 2015.
Surplus Funds (Cash + Investments)
Credit union surplus funds rose $4.5 billion, or 1.2%, in July to reach $387.3 billion, as the strong dollar increase in savings ($5.7 billion), capital ($1 billion) and borrowings ($3.7 billion) exceeded the $8 billion increase in loans, according to the Trends Report.
Credit union surplus funds as a percent of assets fell to 30% in July, down from 32% in July 2015, and the tightest liquidity since February 2009. During the last year, credit unions funded $78 billion in additional loan balances with $72 billion of additional savings balances and $9.9 billion in additional capital. The yield on surplus funds rose slightly to 1.28% in the first half of 2016 compared to 1.17% during the first half of 2015. Investment yields remain significantly below the 4.58% yield on loans in the first half of 2016, which is down from the 4.66% reported in the first half of last year.
Credit unions are repositioning their investment portfolios due to expectations that the Federal Reserve may begin raising interest rates in the 4th quarter of this year, the Trends Report forecasts.
Savings and Assets
Credit union savings balances grew 0.5% in July, slower than the 1% jump in balances in July 2015 that was caused by July 31 landing on a Friday payday last year.
“We expect savings balances to grow 7.8% in 2016, and then slow to 5.5% in 2017 as the Federal Reserve raises interest rates 0.75 percentage points,” according to CUNA Mutual. “This will result in some interest-rate- sensitive members moving savings deposits to money market mutual funds.”
Capital and Other Key Measures
The industry’s weighted average capital-to-asset ratio remained at 10.9% in July compared to the same time period last year, according to NCUA call report data, due to capital growing at the same pace as assets (7.4%). However, during the last 12 months, smaller credit unions reported higher capital-to-asset ratios due to assets growing slower than capital (Figure 10). The 7.4% capital growth rate, which is also known as the return-on-equity ratio, has been trending up lately.
The credit union loan net charge-off rate rose to 0.50% in July, from 0.46% in July 2015, which is the ratio’s long-run average during an economic expansion, CUNA Mutual said. The charge-off rate will fall to 0.48% in the third quarter, which is historically the quarter with the lowest charge-off rate of the year, due to rapid loan growth over the summer months. CUNA Mutual expects the charge-off rate to increase five basis points to 0.53% in the fourth quarter as loan growth slows and delinquent loans increase.
Credit Unions and Members
As of July 2016, CUNA estimates 6,105 credit unions are in operation, down 14 from June. Year-to-date, the number of credit unions fell by 131, which is significantly below the 154 reported in the first seven months of 2015. NCUA’s Insurance Report of Activity showed 11 mergers in July with an average asset size of $13.5 million, down from the 22 mergers reported in July 2015 with an average asset size of $23 million. These smaller credit unions are finding it difficult to increase their member value proposition as fast as larger credit unions and are therefore losing members, CUNA Mutual said.
Just released mid-year NCUA call report data shows 268 credit unions with assets in excess of $1 billion and 236 credit unions with assets greater than $500 million, but less than $1 billion. The greater than $1 billion asset category represents 4.4% of all credit unions, but more than 60% of the credit union system’s assets and 62% of the loans. The median asset size of a U.S. credit union rose to $28.2 million in mid-year, up from $25.7 million at mid-year 2015.
Credit union memberships grew a strong 400,000 in July, or 0.37%, much better than the 232,000 new members, or 0.23%, added in July 2015. Year-to-date credit unions added 2.6 million new members, faster than the 2.1 million members added in 2015. Total credit union memberships reached 107.6 million in July, 4.1% above the level recorded last year. This is the fastest membership growth in more than a generation and is being driven by the 275,000 new jobs added to the U.S. economy in July, according to the Bureau of Labor Statistics, and the record level of loan originations.
“We forecast credit union memberships to grow 3.8% in 2016 and 3.3% in 2017 due to job gains exceeding 2.1 million each year and more Americans reaching-out to credit unions in search of loans to satisfy their pent-up demand for durable goods,” CUNA Mutual said.
A copy of the full Trends Report can be found in CUToday.info’s The Vault here.