MADISON, Wis.–Credit union membership rose a whopping 706,000 in August and is now up 5.02 million over the past year–the population of South Carolina–according to the latest Trends Report from CUNA Mutual Group.
That membership growth is the “fastest in credit union history” and translates into a 4.7% seasonally-adjusted, annualized growth rate, CUNA Mutual said in its analysis. Not surprisingly, loan growth also remains strong and CUs have grown their share of the consumer installment market and are no longer “punching below their weight” when it comes to mortgages.
But the report also forecasts a slowing in lending, and said CUs are in their tightest credit union liquidity position since August 2000.
Here’s a look at how credit unions performed by category during August, as well as year-to-date through that month:
Lending
Credit union loan balances rose 1% in August, above the 0.9% pace set in August 2017, CUNA Mutual said. “During the last 12 months, credit union loan balances increased 9.7%, a slight downshift compared to the double-digit pace set during the last four years,” the Trends Report states. “The pace of consumer installment credit growth has decelerated recently to 9.4%; however, this is still more than double the pace of all other lenders bringing the credit union share of the total consumer installment credit market to 11.4%, up from 11% one year ago.
“For years, credit unions had been punching below their weight when it came to the first mortgage market. Not anymore. Today credit unions have 8.8% of the first mortgage origination market, up from 8.2% last year and 2.6% a decade ago,” the report continues. “Even with credit unions selling off 30% of their entire first mortgage originations to the secondary market in the first half of the year, their mortgage balances outstanding rose 9.8% for the year ending in June.”
CUNA Mutual’s economists are predicting mortgage originations will drop 4-5% in 2019 as rising interest rates restrain home demand.
Credit Union Consumer Installment Credit (CUCIC)
Credit union consumer installment credit loan balances (auto, credit card and other unsecured loans) rose 1.4% in August, a significant acceleration from the 0.2% pace set in August 2017, the Trends Report data show. “Going forward, expect credit growth to slow to a more sustainable pace as interest rates move upward and consumers rein in borrowing as it becomes more expensive,” the report forecasts.
Vehicle Loans
Credit union new-auto loan balances rose 1.2% in August, above the 0.6% pace set in August 2017. Currently new-auto loan balances are rising at an 11.6% seasonally-adjusted annualized growth rate, a slower pace compared to what we have seen over the past few years, CUNA Mutual said.
“Expect a surge in sales in September due to replacement purchases of damaged vehicles from Hurricane Florence,” the report states.
Real Estate Secured Lending – First Mortgages and Other Real Estate
Credit union fixed-rate first mortgage loan balances grew 0.5% in August, slower than the 0.6% pace reported in August 2017. And when comparing year-over-year growth, fixed-rate first mortgage balances rose 11%, which is below the 11.3% reported in the year ending in August 2017, according to the Trends Report. Adjustable-rate first mortgage loan balances grew slower than fixed-rate loans over the last year, rising 6.7% during the last year, but faster than the 5.3% pace reported in the year ending August 2017, the report added/
Credit unions now hold $422 billion of first mortgages on their books, 72% of which are of the fixed- rate variety.
Home equity lending posted another strong month in August, increasing 0.9%, similar to the 0.8% pace reported in August 2017, CUNA Mutual said. The contract interest rate on a 30-year, fixed-rate conventional home mortgage rose to 4.55% in August, from 4.53% in July, and significantly above the 3.88% reported in August 2017.
“We expect the 30-year mortgage interest rate to increase 25 basis points each quarter during the next year, reaching 5.55% by year-end 2019,” CUNA Mutual said. “We expect the interest rate rise to have a negative impact on new and existing housing demand during the next year.”
Surplus Funds (Cash + Investments)
Credit union surplus funds rose $9.3 billion, or 2.7%, in August due to a surge in month end savings deposits, CUNA Mutual said. The surge in deposits both helped to fund strong loan demand ($10.4 billion) and reduce borrowings by $0.6 billion.
Capital grew by $1.2 billion, and credit union surplus funds as a percent of assets fell to 24.6% in August, down from 26.7% in August 2017, CUNA Mutual said.
“This is the tightest credit union liquidity position since August 2000,” said CUNA Mutual’s analysis. “The obverse of the falling surplus funds ratio is the rising loan-to-asset ratio, which reached 71.3% in August, from 69.3% last August, as loan growth outpaced asset growth.”
“This shift in the mix of credit union assets toward higher-yielding loans and away from lower-yielding investments has pushed up credit union asset yields,” the analysis found.
“Over the last year, credit union yield-on-asset ratios rose to 3.72% from 3.47% as the asset portfolio shifted toward loans earning an average return of 4.6% and away from investments earning an average return of 1.8%. The yield-on-loans actually rose from 4.5% in the second quarter of 2017 to 4.6% in the second quarter of 2018 as amortizing loans re-priced to today’s higher interest rates, and with credit union cost of funds only rising nine basis points during the last year to 0.63%, net interest margins increased 16 basis points in the second quarter to 3.09%, compared to 2.93% a year earlier.”
Saving and Assets
Credit union savings balances rose 1.4% in August, above the 0.1% rise in balances reported in August 2017 due to August 31st landing on a payroll Friday, the Trends Report said.
“August is normally one of the weakest months of the year for savings growth due to seasonal factors, such as vacation spending and auto loan down payments,” according to the Trends Report. “Credit union deposit growth is becoming more balanced. During the first eight months of the year, credit union deposits rose $55.7 billion. Contributing to this growth was a $12.8 billion increase in certificate deposits, thus making up 23% of total deposit growth.”
Capital & Other Key Measures
The credit union movement’s weighted average loan-to-share ratio reached 84.5% in August, up from the 82.1% reported in August 2017, due to loan balance growth (9.7%) outpacing savings balance growth (6.6%), the Trends Report states.
Previous peaks in loan-to-share ratios occur right before recessions, such as the 79.8% in 2000 and 84.1% in 2007.
“More loans lead to higher earnings and capital ratios, holding all else equal,” the Trends Report said. “However, credit unions with higher capital ratios tend to lend more, which leads to even higher earnings and capital ratios in the future and creates a virtuous feedback loop.”
The loan delinquency rate (loans two or more months delinquent as a percent of total loans outstanding) fell to 0.66% in August, down from 0.77% in August 2017, a decline caused by the loan balances’ denominator growing faster (9.7%) than the delinquent loans’ numerator (-6.1%), CUNA Mutual said.
Credit Unions and Members
As of August 2018, CUNA estimates 5,686 credit unions were in operation, down 208 from August 2017. Year-to-date the number of credit unions fell by 114, which is below the 128 decline reported in the first eight months of 2017, the Trends Report states.
“The credit union movement continued to contract at a 3.5% pace over the last year, which is the long run average decline over the last 38 years,” CUNA Mutual’s economists said.
“Small credit unions continue to struggle with earnings. During the first half of 2018, credit unions with assets less than $20 million reported an average return-on-asset ratio of only 25 basis points, which is up nine basis points from last year’s 14 basis points ratio.
“Large credit unions reported rising return-on-asset ratios in the first half of 2018 compared to the first half of 2017 due to a nine-basis point increase in ‘other income’ from the NCUA Corporate Stabilization refunds and a six-basis point increase in net interest margins as strong loan growth pushed up yield-on-asset ratios 26 basis points,” the Trends Report continues. “These positive income statement items were offset somewhat by a seven-basis point increase in provision for loan loss expenses.”
Meanwhile, credit union memberships soared to a record 706,000 in August, or 0.6%, much better than the 477,000 new members, or 0.43%, added in August 2017, CUNA Mutual said.
During the last year, credit unions added 5.02 million new members (the fastest in credit union history – which translates into a 4.7% seasonally-adjusted, annualized growth rate, CUNA Mutual said.
“Membership growth is being driven by strong job gains and Americans’ demand for credit. Membership growth is also being supported by an unintended consequence of the Durbin Amendment of the Dodd-Frank Act, which capped the fees large banks can charge merchants to process debit card transactions (21 cents plus 0.05% of the total charged),” CUNA Mutual said. “To make-up for this lost revenue, banks increased their monthly fees for having a debit card or a checking account. The higher charges are driving many bank customers to their local low-or-no-fee, not-for-profit credit union.”
