CUs Hit Certain Milestones as Overall Growth Keeps Slowing

L-R: Jay Johnson, Chief Collaboration Officer for Callahan and Associates; and Jon Jeffreys, President and CEO of Callahan and Associates
L-R: Jay Johnson, Chief Collaboration Officer for Callahan and Associates; and Jon Jeffreys, President and CEO of Callahan and Associates

The U.S. credit union industry’s net interest margin exceeded its operating expense ratio for the first time since 2011, and its return on assets (ROA) is nearing 1 percent — a historical industry standard that hasn’t been experienced in several years.

As credit union leaders take pulse of the economy’s changes, they are collectively experiencing these trends and many others.

(View Dr. Robert Eyler’s recent August webinar on “Key Economic Issues Setting the Stage for Second-Half of 2019"—ACCESS ARCHIVED WEBINAR)

The following is a quick synopsis of Callahan & Associates’ second quarter 2019 “TrendWatch” webinar hosted this past week on U.S. credit union trends. It was presented by Jay Johnson, chief collaboration officer for Callahan and Associates; Jon Jeffreys, president and CEO of Callahan and Associates; and Jason Haley, managing director for ALM First’s investment management group:

  • Credit union growth (membership, deposits and lending) slightly accelerated in second-quarter 2019 from the slowing pace experienced in early 2019. “Momentum is back in the outlook for the rest of 2019,” Johnson said. Short-term interest rate increases over the past couple of years (barring the most recent rate cut by the Federal Reserve in July) were still helping credit unions’ net interest margins.

  • Total credit union loan growth continued slowing while deposit growth continued picking up steam. This trend isn’t expected to stop or reverse anytime soon. Loans grew 6.5 percent year-over-year while deposits grew 6.1 percent. Membership grew 4.3 percent (the industry now boasts 120 million members). Loan growth is slowing from a “record” four-year run. “We’re coming off an amazing, unprecedented growth period,” Johnson said. Credit unions’ total loan portfolio is $1.08 trillion — and loan originations (the incoming pipeline) remain positive.

  • However, “consumer” and all types of “real estate” loans at credit unions declined quarter-to-quarter. There was a 2 - 3 percent drop in these two categories from the first to second quarter of 2019. “It will be interesting to see what upcoming mortgage refinances will do to these numbers by third quarter,” Johnson said. “And with shorter-term interest rates being cut by the Fed, we’ll see if this changes anything as well. However, overall lending seems to be gaining some traction in the second quarter of 2019.”

  • Credit unions’ market share of auto loans and mortgages are declining in the broader marketplace. The industry’s share of auto lending dropped to 18.4 percent (down from 19.8 percent a year ago). “Credit unions are maybe pulling back a little on indirect used and new auto lending — plus, overall new car sales are lower than in the recent past,” Johnson said. The industry’s share of mortgages in the marketplace was 8.1 percent (down from 8.7 percent a year ago). “But with lower mortgage rates, we may see an increase in the second half of this year — we’ll see,” Johnson added. Jeffries also added that: “Fintech companies have taken market share away from traditional players in the bank market, so the fact credit unions have been able to grow and maintain mortgage market share is admirable.” Additionally, the industry’s revolving consumer loan market share continues to steadily rise (to 6.2 percent).

  • Second-quarter 2019 saw the smallest change in year-over-year “loan balances” at credit unions since 2013. “Consumers are trying to manage their personal balance sheets as best they can in what still seems to be a healthy economy,” Johnson said. Year over year, all loan categories experienced slower growth except “other real estate,” which includes the combined category of home equity lines of credit (HELOCs)/second mortgages (rose from 5.1 to 7.9 percent growth rate). Otherwise, first mortgages slowed from 10.6 percent to 6.8 percent; new autos slowed from 11.7 percent to 5.2 percent; used autos slowed from 9.9 percent to 5.5 percent; and credit card lending slowed from 9.1 percent to 7.7 percent.

  • Credit unions in California, Nevada, and many other coastal, northwestern and southwestern states now stand in the lower-bound range of annual industry loan growth (but not the absolute lowest). Only four states were experiencing year-over-year double digit loan growth — Mississippi, Wyoming, Maine, and Minnesota (compared to a couple years ago when the majority of states were experiencing this trend). In contrast, states such as Alaska and others were experiencing the slowest loan growth.

  • Total credit union loan delinquency dropped to 0.63 percent (down by 0.04 percent) and remains at a historically “healthy” level. It only rose in two sub-categories (other real estate and credit cards), but those categories weren’t enough to raise total delinquency (which includes the much larger dollar-proportional areas of used auto loans, new auto loans, and mortgages). Sub-category delinquency rose in “other real estate” by 0.02 percent to 0.5 percent, and in credit cards by 0.06 percent to 1.21 percent.

  • Credit unions’ loan-to-share ratio may be starting to plateau. While it’s too soon to tell, this measurement slightly rose to 83.3 percent, inching up from a year ago. “The rate of loan-to-share growth is slowing,” Johnson said. “But this is the highest loan-to-share ratio we’ve seen mid-year in any year since we’ve been tracking it.”

  • Certificates of deposit (CDs) are leading the charge in credit unions’ total deposit growth. This has been a growing trend over the past two years — and today, CDs make up a hefty 62 percent of the net increase in deposit growth at credit unions (CD growth was negative in 2013 and 2014). As recent as 2015 – 2017, the past driver of deposit growth was savings accounts. “Certificates are now the source of funding for many credit unions,” Johnson said. “Many credit unions could borrow funds elsewhere, but they’d rather reward their members if they can.”

  • Some product penetration for credit union members has noticeably risen over the past five years, and others not as much. Auto loan and checking account penetration has risen from 17 to 21 percent and 53 to 58 percent, respectively, among members (from 2014 – 2019). But real estate loan penetration has only gained from 5.6 to 5.7 percent, and credit cards from 16.2 to 17.5 percent.

  • Nonetheless, credit unions’ “average member relationship” continues rising. It now stands at $19,097 (driven by average-loan-balances-per-member increasing 23 percent over the past five years). Out of this $19,097, about $10,672 is deposit based and $8,425 is loan based.

  • Credit unions’ “interest income” on loans and investments has continued driving the rise in total revenue for a second consecutive year. Loan yields are rising slightly faster than cost-of-funds (deposit interest expense). Average yield on loans was 4.88 percent, and average yield on investments was 2.42 percent (while average deposit costs were 0.97 percent).

  • The credit union industry’s “net interest margin” exceeded its operating expense ratio for the first time since 2011. Both the operating expense ratio (3.17 percent as of second quarter) and net interest margin (3.18 percent) have been rising over the past couple of years in tandem — but net interest margin has been rising faster. The spread between these two measurements was 25 basis points in 2014 but has been steadily shrinking since then.

  • Credit unions’ return on assets (ROA) is approaching 1 percent — a historical industry standard that hasn’t been experienced in several years. It stood at 0.96 percent in the second quarter after rising significantly from the depths of the post-Great Recession period from 2009 – 2011. Additionally, the industry’s net worth ratio remained at a healthy 11.3 percent.

  • Questions to ponder include: Where can your credit union take some more risk if it is meant to be purpose-driven and have a positive impact on members? Where are your credit union’s best growth opportunities? How can your credit union better incorporate members into its processes? Can your credit union clarify its purpose and be a differentiator in the marketplace? How can your credit union best measure the value it is delivering to members? How can your credit union ensure it is positioned for long-term success?

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