Experts Discuss Credit Union Trends and Fed Projections

L-R: Jason Haley, managing director of the investment management group for ALM First, and Jon Jeffreys, managing partner at Callahan & Associates and vice president/assistant treasurer for TRUST Mutual Funds.
L-R: Jason Haley, managing director of the investment management group for ALM First, and Jon Jeffreys, managing partner at Callahan & Associates and vice president/assistant treasurer for TRUST Mutual Funds.

Credit unions are still posting solid growth numbers as the economy keeps consumers employed and spending money, according to a recent Callahan and Associates’ third-quarter “TrendWatch” webinar.

But recent U.S. economic and industry trends have the experts keeping a close watch on the quarterly environment going into 2019. Ongoing issues include the United States’ “trade tension” with foreign countries, Italy’s volatile bond market and its relationship with the European Union, the U.S. Federal Reserve’s “quantitative tightening” and short-term interest rate policies, and concerns that U.S. corporations’ latest positive earnings season may have hit a peak for the current economic cycle.

Even though economic growth seems to have ramped up recently, “some think 2019 may become the most inflationary environment since before the Great Recession of 2007 – 2009,” said Jason Haley, managing director of the investment management group for ALM First. “Will companies pass the higher costs of worker wages, transportation expenses, operational inputs, and tariffs to consumers? Also, what will the Fed’s monetary policy be?”

Haley noted the Fed is no longer referring to monetary policy as “accommodative” (as opposed to the central bank’s two other terms—“neutral” and “restrictive”). If inflation is within the Fed’s target range, “that’s the best outcome in the world,” he said. “However, it’s very hard to know in ‘real time’ what the Fed’s target ‘neutral’ range is.”

He said it’s “refreshing” to see that Fed board members admit they don’t have any idea “where they are going” with respect to future monetary policy. “That’s because the economic, labor, wage and inflation data come along and they are never the same in any given environment,” Haley added. “Some board members are commenting they don’t actually know where ‘neutral’ is. They are just projecting as the economic data comes in.”

The Fed’s future anticipated projections (its “dot plot” chart) shows one more federal-funds interest rate increase in 2018 and three in 2019—and maybe one in early 2020, making its benchmark rate settle at 3.5 percent in the future. But its longer-term projection afterward is 3 percent. “This is effectively what they think ‘neutral’ is in the long-term,” Haley said. “They think they will have to go into ‘restrictive’ territory, or 3.5 percent, before coming down to a ‘neutral’ level—about 3 percent.”

When it comes to U.S. credit union trends, Callahan and Associates experts zeroed-in on the following insights for the annualized third-quarter 2018 period:

  • Although stellar deposit and loan growth has propelled credit unions over the past few years, recently that growth has started to decelerate. Also, investment growth is slowing down as credit unions decide to let investments “role off” and they reallocate those dollars elsewhere.
  • In general, credit unions are still increasing membership, products and services at a solid clip and “still outperforming on a relative basis.”
  • The average U.S. credit union member relationship is up 2.5 percent, mostly due to lending relationships. “It appears when members are joining, many are bringing their financial services relationship with them.”
  • Credit unions are the financier of one out of every five cars/vehicles in the nation.
  • The industry’s mortgage market share now stands at 8.4 percent—“and this is in a purchase market, not a refinance market.” The more “innovative” products such as 5-5 adjustable-rate mortgages (ARMs), 5-1 ARMs, and 15-15 ARMs are seeing noticeable upticks. Therefore, the amount of mortgage loans sold to the secondary market is dropping. Also, the only other area experiencing a noticeable rise is in “other real estate.”
  • Deposit growth has noticeably slowed down as it has over the past 7 quarters beforehand because “consumers continue saving less during times of economic prosperity.” More so, “core deposit” growth has significantly decelerated—so many credit unions are getting competitive on certificate of deposit rates to fill their liquidity gap. Also, loan growth has now outpaced deposit growth for 22 consecutive quarters, with the industry’s loan-to-share ratio hitting 85 percent today versus 69 percent in 2013.
  • Loan delinquencies keep dropping from an aggregate perspective, and credit unions have reserved $1.27 for every $1 going delinquent or expected to go delinquent—a historically high (and safe) level.
  • Credit unions’ “corporate stabilization” rebates into the National Credit Union Share Insurance Fund (NCUSIF) have been a significant driver of retained earnings (income) this past quarter, probably bumping the industry’s return on assets (ROA) by 7 basis points for the year by the time 2018 ends.
  • Net interest margin (NII) on loans and the operating expense ratio (OpEx) now equal each other (both are 3.12 percent), showing the industry has kept operational expenses constant during the past five years. (NII was 2.79 percent and OpEx was 3.15 percent in 2013)
  • Return on assets (ROA) jumped 14 basis points and stands at a healthy 0.93 percent today, and the industry’s net worth ratio is 11.2 percent.
  • “The economic environment is allowing the industry to make more money and put some away for a rainy day. It feels like a good time to be a credit union.”

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