Credit unions in the United States have generally delivered good financial performance across the board in 2014, bolstered by a strengthening economy, an improving job market and — most crucially — rising loan demand from members who had stood on the sidelines during the financial crisis.
With widespread expectations of continued job growth and economic stability, most CU experts and analysts predict the industry will enjoy another strong year in 2015.
According to recent data from NCUA, lending in all sub-categories exhibited robust growth through the end of the third quarter of 2014.
On the whole, outstanding loan balances surged by 10.1% over the past 12-month period to $695.3 billion. Breaking down the data, new auto loans climbed by 19.4% to $82.4 billion, used auto loans jumped 12.2% to $140.3 billion; net member business loan balances increased 12.6% to $50.4 billion; first mortgage real estate loans moved up 9.1% to $286.4 billion; and second-mortgage loans rose edged up 1.1% to $71.5 billion.
"The numbers were very solid across the board," John Worth, chief economist at NCUA told Credit Union Journal. "Loan demand and origination had bottomed out in , when we actually witnessed negative loan growth."
Since then, loans — the very heart and soul of credit unions' financial health — delivered 4% and 8% increases in 2012 and 2013, respectively, followed by a strong 10% jump last year.
"An improving economy stimulates loan demand, and lending growth contributes to continued economic growth" said NCUA chairman Debbie Matz in a statement. "So, it comes as no surprise that the credit union system grew with and boosted the economy In fact, federally insured credit unions had their highest annual loan growth rate [for the period ended third quarter of 2014] since the first quarter of 2006."
CUNA Senior Economist Mike Schenk said that CU performance so far has been consistent with what is expected the midst this type of economic recovery.
"We are witnessing an improving economy, a better labor market, and higher incomes," Schenk told Credit Union Journal. Housing and labor markets should continue to improve in 2015, setting the foundation for continued strong financial performance of credit unions.
Indeed, with the current unemployment rate at 5.8% — a six-and-a-half-year low — a report from the Federal Reserve forecasts a jobless rate of between 5.2% and 5.3% by the end of 2015, edging further down to between 5.0% and 5.2% for 2016.
"There is practically a one-to-one direct correlation between the employment rate and the strength of loan demand," Schenk noted. "In good economic times, borrowing and lending increase, while savings go down. When an average person buys a big-ticket item, like an automobile, they borrow money to pay for it."
Reflecting that brighter employment picture, the rate of delinquency and charge-offs continue to slide down to just 0.85% from 1.02% at the third quarter of 2013.
Fewer Delinquencies and Charge-Offs
"Credit unions do a very good job of collecting loans," said Geoff Bacino president of Bacino & Associates, an Alexandria, Va.-based consulting firm. "And since credit unions practice a more conservative type of lending than banks, they've usually endured lower rates of delinquencies and charge-offs."
As the data reveals, autos and mortgages comprise the largest chunk of credit unions' loan businesses, suggesting that members and consumers feel comfortable enough with the state of the economy to incur new debt to pay for big-ticket items.
"If these two segments of the market [auto loans and mortgage loans] are doing well, the whole movement is likely prospering," Schenk added.
Curt Long, director of research and chief economist at NAFCU, noted that vehicle loans are closely linked to the nation's overall economic performance.
"During a recession, auto loans tend to be flat as people delay selling aging cars, creating a lot of pent-up demand," Long said. Following a 10% overall loan growth this year, he forecasts 2015 loan growth of about 9%, "a little less than the 2014, but still quite healthy."
Coincident with loan growth, membership in credit unions continue their inexorable upward trend. In the third quarter of 2014, membership in federally insured credit unions leapt by 808,900 reaching 98.7 million.
Along with better job data and higher loan demand, Schenk projects credit union membership should continue to climb in 2015.
Profitability trends are also looking good.
One of the best indicators of a credit union's profitability, the return on average assets ratio, climbed rose to an annualized 83 basis points through the end of the third quarter 2014, three basis points higher than the third quarter of 2013. Also, net income for through Sept. 30 expanded by 8.6% to was $6.8 billion.
Credit unions are also very well capitalized — with virtually all federally-insured institutions (97.5%) reporting a net worth ratio at or above 7%, the statutory requirement, at the end of the third quarter of 2014, versus 96.6% at the end of the third quarter of 2013.
"Net worth figures for the industry are rising," Long said. "We are encouraged by this development."
However due to a confluence of factors — particularly the relentless barrage of increasingly costly regulatory demands from federal agencies — the number of credit unions continues to fall, with smaller credit union bearing the overwhelming brunt of mergers and closures. Year-over-year, the number of credit unions slipped by 270 (4.1%) to 6,350 at the end of the third quarter of 2014.
Long predicts that the long-term trends consolidation of credit unions — as in the banking industry — will continue in 2015.
"We see no relief from consolidation, without some abatement in regulatory burdens," Long said. "Small credit unions will continue to struggle to survive."
Moreover, despite the generally sanguine state of credit union financials, such performance and sustainability depends largely on asset-size. Simply put, larger credit unions have amassed a much bigger share of the growth witnessed in assets, loans and membership — delineating an industry that is highly stratified.
For example, NCUA noted that federally-insured credit unions with at least $500 million in assets hold more than $766 billion in assets, or 69% of total assets, while also enjoying higher growth and higher returns on average assets than the credit union movement as a whole.
Indeed, on average, credit unions with less than $500 million in assets have been delivering modest, flat or negative growth in assets, loans and net worth.
This is a trend Credit Union Journal has reported on in its ongoing coverage of the "Great Divide" between small and large CUs.
Interest Rate Concerns
The Federal Reserve has kept the Fed Funds Rate at historically low — near-zero — levels for the past six years, in response to the global financial crisis. Now on the cusp of a new year, fears are spreading that the Fed will have to hike short-term rates at some point in 2015.
"Credit unions are clearly monitoring interest rate risk," Long said. "A quick rise in rates would be especially bad for smaller credit unions, as their costs will go up." But any boost in interest rates would likely be a gradual and incremental, he added, softening the blow.
The Mortgage Bankers Association predicts that the Federal Reserve will keep short-term rates near zero until mid-2015, "when we expect the first fed funds rate increase," the group stated in a recent report.
It is also important to remember that credit unions have historically managed interest rate risks very well, according to Schenk.
"Credit unions that are run very conservatively take very little risk," Schenk added. "They are careful about exposure. I can't think of one credit union that failed due to interest rate risk issues."
In response to such climbing interest rates, credit unions could — among other measures — reduce their exposure to long-term investments. This latter option has already taken place to some extent. "The fact that credit unions are turning towards making loans and reducing their reliance on long-term investments is encouraging," Matz said. "A loan to a member is the best investment a credit union can make and benefits members directly. To protect the safety and soundness of the credit union system, NCUA will continue to carefully monitor signs of interest-rate risk."
But Worth points out that as credit unions vary widely by asset size, investment profiles, priorities and mandates, there is no one prescriptive approach to dealing with higher interest rates. "Some may change their mix of assets, unload other assets, rearrange portfolio holdings, etc., in order to strengthen the balance sheets," he said. "There's a large variety of strategies."