Credit Union Trends Report: December 2014 (October 2014 data)

ECONOMIC, COMPETITIVE, AND REGULATORY ENVIRONMENT

Economic activity increased 3.9% in the third quarter, at a seasonally adjusted annual rate, and grew 2.4% year over year. Final sales, which exclude the support to GDP from inventories, rose 4.1% indicating spending momentum is building for the U.S. economy.

The economy added 243,000 jobs in October, slightly less than the 271,000 reported in September, and the unemployment rate fell to 5.8%. This signals a tightening labor market with wage growth expected to accelerate in the near future. The 25% drop in oil prices from July through October provided consumers a boost in purchasing power similar to the 29% oil price drop experienced back in 1998. By 1999, retail sales grew at an annual pace of 8.5%, twice the 4.5% reported in 2008, which indicates retail sales and credit union lending in 2015 are looking up.

Report Highlights

• At the end of October, CUNA’s monthly estimates reported 6,585 CUs in operation, down 5 CUs from one month earlier. Year to date the number of credit unions declined by 210, below the 236 lost in the first 10 months of 2013 and also 2014.
• Credit union savings balances rose an outsized 1.3% in October, and 4.6% year-to-date, due to the month ending on a Friday payday and falling gas expenditures. Year-over-year asset growth of 5.8% is outpacing savings growth due to borrowings rising 19.2%.
• The nation’s CUs increased their loan portfolios 0.85% in October, 8.9% YTD and 10.3% during the past year. Member business loan balances rose 3.8% in October, the fastest growing category, followed by adjustable-rate mortgages, 2.3% and new auto loans, 2.2%.
• Credit union memberships rose 186,000 in October to reach 101.6 million, a 0.2% increase from September, and 3.3% year to date. Year-over-year, memberships are up 3.6%, the fastest pace since July 2003. With job growth expected to be over 250,000 a month in 2015 and new car sales to reach 17 million units, membership growth will remain strong for the next 12 months.
• Credit union capital grew 9.9% during the last 12 months indicating stronger earnings performance for many credit unions. The movement’s return-on-asset ratio rose to 0.88% in the third quarter, up four basis points from the second quarter, due to a 7 basis point increase in asset yields, a 3 basis point increase in non-interest income, a 3 basis point increase in operating expenses and a 3 basis point rise in loan loss provision expense. Credit union capital-to-asset ratio remained at 10.8%, the highest in six years.

Total Lending

Credit union loan balances rose 0.85% in October, slightly better than the 0.72% pace reported in October 2013. During the last 12 months, credit union loan balances rose 10.3%, as credit union members’ willingness and ability to borrow and spend have both rapidly improved. Consumer confidence in October rose to levels not seen since October 2007, two months before the onset of the Great Recession.

Credit union loan delinquency rates (delinquent loans as a percent of total loans) fell to 0.74% in October, the lowest rate since August 2007. There is a strong correlation between credit union loan delinquency rates and the nation’s unemployment rate. During the last 12 months, the unemployment rate fell 1.5 percentage points, from 7.3% to 5.8%, while the delinquency rate fell 0.25 percentage points, from 1.01 to 0.74%. The dramatic improvement in both metrics is encouraging lenders to loosen their loan underwriting standards.

Credit Union Consumer Installment Credit (CUCIC)

Credit unions’ consumer installment credit balances rose 0.85% in October, or $2.5 billion, above the 0.5% reported in October 2013. Rising debt levels coincided with a modest 0.3% growth in total retail sales. Retail sales were depressed because of falling gasoline prices. But retail sales excluding gasoline stations rose a healthy 0.5%, indicating consumers did spend some of the money saved at gasoline stations. During the last 12 months, credit union consumer installment credit balances rose a healthy 12.3%. The last time credit unions reported annual growth over 12% was back in 1995. Credit card balances were unchanged in October signaling members are still wary of taking on higher-rate debt, and are using their credit cards for payment convenience by paying off new charges.

Vehicle Loans

Credit union auto lending continued to surge in October with new auto loan balances rising 2.2%, above the 1.6% reported in October 2013. This is the fourth month out of the last 5 that monthly new auto loan growth exceeded 2%. During the last 12 months, credit union new auto loan balances rose 20.5%, the fastest pace since August 1995. Vehicle sales (cars and light trucks) rose to a 16.5 million seasonally adjusted annual rate in October. Auto sales are currently growing at the fastest pace since 2006, the year home prices peaked.

Vehicle sales were boosted by increasing household wealth, lower gasoline prices, an improving labor market, new models, and better access to credit for borrowers with less than a prime credit history. The sales of expensive cars, those priced over $50,000, have surged by over 30% in the last year and will reach over 1 million units sold in 2014.

Meanwhile the sales of cars priced less than $50,000 are up 4.1% during the last year. Vehicle sales are expected to remain above 16 million units through 2017 as pent up demand is satiated and the economy produces around 3.4 million jobs annually.

Real Estate-Secured Lending – 1st Mortgages and Other Real Estate

Adjustable-rate first mortgage loan balances rose a robust 2.3% in October, the second fastest growing loan category for the month, and were up 15.4% year-over-year. Fixed-rate first mortgage balances fell -1.2% in October, but are up 5.3% during the last year. Existing home sales rose 1.5% in October, but are up only 2.5% during the last 12 months. The existing median home price reached $208,300 in October, up 5.5% since October 2013. Refinancings remain tame and are near a 6-year low given that mortgage rates have been so low for so long. Most homeowners who were willing and able to refinance have already done so.

Low interest rates, improving consumer confidence and rising home prices pushed home equity loan balances up 1.4% in October, significantly better than the -0.3% reported in October 2013. During the last year, home equity balances rose 7.8%, the fastest pace since August 2009. Credit unions’ interest rates on home equity lines of credit average 4.11% in October, according to Informa Research Services, 26 basis points lower than the bank average. Second mortgage loan balances also rose in October, increasing 1.1%, as the first mortgage refinance business dried up and fewer second mortgages were rolled into refinanced first mortgages.

Home prices rose 0.5% in October and are up 6.1% during the last 12 months, according to the Core Logic Home Price Index. However, prices are still 12% below their peak set back in April 2006. The home appreciation rate is expected to taper off to 5% in 2015 due to an increasing supply of homes. Rising home prices will increase household wealth and maintain the upward momentum of the Consumer Confidence Index. Both will encourage consumers to lower their savings rate and increasing spending on consumer durables in 2015.

Mortgage credit is still constrained because of new regulations, but is slowly easing as policymakers work to bring down some regulatory impediments. The Federal Housing Finance Administration, FHFA, announced plans in October to reintroduce mortgages with down payments as low as 3% through Fannie Mae and Freddie Mac. This should increase access to mortgage credit, which in turn boosts homeownership with low-to-moderate income and first time homebuyers.

Surplus Funds (Cash + Investments)

Credit union surplus funds rose 2.4% in October, or $9.0 billion, due to a large $13 billion surge in savings deposits. Savings balance growth has averaged a little over 3 billion each month. So approximately $10 billion of the $13 billion surge in savings balances was due to the month of October ending on a payroll Friday. Credit unions therefore placed the lion’s share of these new deposits into short-term investments with the expectation of abnormally large deposit withdrawals in the month ahead.

During the first nine months of 2014, the yield on surplus funds rose to 1.21%, up from 1.10% reported during 2013. The gain was a consequence of credit unions shifting investments into longer maturity investments. Surplus funds with a maturity less than one year fell from 42.5% in 2013 to 39.8% today. Meanwhile, investments with 1-3 years maturity rose from 23.9% of surplus funds in 2013 to 26.4% in 2013. Investments with even longer maturities rose from 21.2% to 23.6% of surplus funds. This is a signal credit unions believe the Federal Reserve will keep rates lower for longer.

Savings and Assets

Credit union savings balances rose an outsized 1.3% in October, and 4.6% year-to-date, due to the month ending on a Friday payday and falling gasoline prices reducing gas expenditures. This pushed year-over-year savings balances growth to 5.0%. Total credit union savings balances now stand at $972 billion, or 5.5% of nominal gross domestic product. In other words, credit union members’ savings deposits equal approximately 20 days of annual national income, up from 16.4 days set back in 2007, just before the onset of the Great Recession. Year-over-year asset growth of 5.8% is outpacing savings growth due to borrowings rising 19.2% and capital rising 9.9%.

Capital and Other Key Measures

Credit union capital grew 9.9% during the 12 months ending in October, while the 3-month moving average rose to 10.1%, the fastest year-over-year pace since June 2003, see figure 6. Net income is the income statement flow account that allows the balance sheet capital account to increase. Net income as a percent of assets came in at a relatively strong 0.88% in the third quarter, above the 0.69% reported in the third quarter of 2013 and above the 0.83% reported in the second quarter of 2014. Rising net interest margins during the last year boosted credit union return on assets.

Credit Unions and Members

As of October 2014, CUNA estimates 6,585 credit unions were in operation, five fewer than September. Using a 3-month moving average to smooth out large month-to-month volatility shows an average loss of 24 credit unions per month.

This is slightly more than one credit union per business day being merged into another credit. Year-to-date, the number of credit unions fell 210, slightly below the 236 credit union decline reported in both 2013 and 2014. During the past 12 months, the number of credit unions fell 249, compared to the loss of 281 credit unions in 2013.

Strong job creation in October helped propel credit union membership gains to 186,000. Total memberships reached 101.6 million, a 3.6% increase over the last year. This is the fastest membership growth rate since July 2003. Memberships rose 0.2% in October, faster than the zero growth reported in October 2013, and 3.3% year-to-date.

U.S. job growth and credit union membership growth is highly correlated. In October, the U.S. added 243,000 jobs, down from 271,000 reported in September, but above the previous 3-month moving average of 239,000. The types of jobs created were well-diversified across many sectors: lower-paying retail jobs, middle-income manufacturing and construction jobs, and higher-paying professional and healthcare jobs. In 2015, job growth is expected to accelerate to over 300,000 net new jobs per month. This will underpin continued strong credit union membership growth next year. The labor market tightened in October as the unemployment rate fell to 5.8% from 5.9% in September. Expect wage gains to accelerate in earnest in 2015 as the unemployment rate approaches its long-run natural rate of 5.5%.

If you would like a PDF copy of the full report, please email Jess.Noelck@cunamutual.com

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