MADISON, Wis.–After a torrid start to 2018, perhaps it’s no surprise credit union membership gains have slowed significantly during the first two years of 2019 when compared with one year earlier, a newly released analysis shows.
Credit unions added 470,000 new members during January and February, far below the 910,000 new members added over the same period in 2018, according to CUNA Mutual’s April Trends Report, which is based on data through February. Nevertheless, the company is still projecting some 3.8 million people will join a credit union this year.
Separately, the CUNA Mutual Trends Report analysis suggests trends in lending and savings rates offer indicators the country will see at least a mild recession in 2020.
Here’s a look at how credit unions performed by category through February, according to the CUNA Mutual Trends Report:
Total Credit Union Lending
Credit union loan balances rose 0.1% in February, slower than the 0.2% pace reported in February 2018, and 8.6% during the last 12 months, CUNA Mutual reported, noting February is historically the weakest loan growth month of the year, with seasonal factors typically shaving off 0.6 percentage points from the underlying trend growth rate. Loan growth is expected to slow to 8% in 2019, slightly less than the 8.9% reported in 2018.
“Credit unions are still riding high on the boom portion of the short-run credit cycle, as measured by the difference between the annual growth rates of loans (8.6%) and deposits (6.3%),” CUNA Mutual said in its analysis. “Credit growth drives short run economic activity as borrowing pulls income from the future to allow increased spending in the present. But when the future comes, consumption spending will have to fall below income to facilitate the paying down of the debt accumulated in the past. Lower spending leads to slower economic growth if not an outright recession…Deposit growth will then exceed loan growth and the growth rate gap turns negative. Historically, a growth rate gap of 0% or less is correlated with a recession.”
CUNA Mutual forecast the loan-less-deposit growth rate gap is expected to remain positive through 2019 and then turn negative in 2020, marking the onset of the next recession.
Credit Union Consumer Installment Credit (CUCIC)
Credit union consumer installment credit balances (auto, credit card and other unsecured loans) rose 0.04% in February, below the 0.6% pace set in February 2018, due to falling credit card, new auto and unsecured personal loan balances offsetting rising used auto loan balances, CUNA Mutual said. Credit union consumer installment credit grew 10.5% during the last year, better than the total market excluding credit unions.
Credit union new auto loan balances fell 0.3% in February, below the 0.1% gain reported in February 2018. The Trends Report notes February is historically the weakest new-auto loan growth month of the year, with seasonal factors typically shaving -0.68 percentage points from the underlying trend growth rate. On a seasonally-adjusted annualized growth rate basis, new auto loan balances rose 9.3% in February – below the 12.1% reported one year earlier, the analysis states.
Real Estate Secured Lending – First Mortgages and Other Real Estate
According to the Trends Report, credit union fixed-rate first mortgage loan balances rose 0.2% in February, below the 0.5% gain reported in February 2018, due to a slowdown in existing home sales during the last few months. Fixed-rate first mortgage balances are up 9% over the last year while adjustable-rate mortgages grew even slower at 7.4%. Home equity loan balances grew 6.6% as members tap into rising home equity due to rising home prices to release some of their pent-up demand for cars, appliances and furniture, CUNA Mutual said.
The contract interest rate on a 30-year fixed-rate conventional home mortgage fell to 4.37% in February, down from the 4.46% in January and greater than the 4.33% reported in February 2018.
“Expect home prices to rise 3-4% in 2019 as the economy adds another 2.4 million jobs and young adults release some of their pent-up demand for housing,” the Trends Report forecasts. “Low gas prices are also allowing potential homeowners the ability to increase their pace of savings accumulation for a home down payment. Furthermore, rising rents are tilting the rent-versus-buy calculation more and more in favor of purchasing.”
Surplus Funds (Cash + Investments)
Surplus funds rose to 24.4% of assets in February from 23% in January due to a surge in savings deposits. However, the ratio is down more than two percentage points from the 26.5% reported in February 2018 due to loan growth exceeding deposit growth over the last year (8.6% versus 6.6%), the Trends Report states.
“Credit unions subtracted $7.8 billion from their liquidity position during the last 12 months to help fund the $85.1 billion jump in loan balances,” according to the Trends Report. “The rest of the funding for the loan increase came from a $74.9 billion increase in deposits and a $14.5 billion jump in capital. With loan balances expected to grow another 8% this year ($85 billion), expect surplus funds as a percent of assets to fall below 22% by year end, the lowest relative liquidity position since the 1970s.”
The analysis added that with the Federal Reserve not expected to raise short-term interest rates during 2019 and expectations of strong loan demand, credit unions are holding more short-term investments and less long-term.
Savings and Assets
Credit union savings balances surged 2.5% in February, slightly above the 2.3% gain reported in February 2018, due to the seasonal factors of tax refunds and bonuses being deposited in credit union members’ share draft and regular share accounts, which increased 7.9% and 2.2%, respectively, CUNA Mutual reported. Credit union savings balances grew at a 6% seasonally-adjusted annualized growth rate in February, due mainly to lower gas prices reducing consumer spending.
The company is forecasting credit union savings balances will grow 7% in 2019, exactly equal to its long run 30-year average.
Capital and Other Key Measures
The credit union industry’s average loan net charge-off rate rose to 0.61% in the fourth quarter, down from the 0.7% reported in the fourth quarter of 2017 and above its “natural” long-run rate of 0.5%.
“In other words, 50 cents of every $100 dollars of credit union loans are normally charged-off each year,” CUNA Mutual sad. “Rapid loan growth over the last four years has allowed enough time for these new loans to ‘season,’ which is now increasing loan charge-off rates as some consumers experience credit deterioration.”
The credit union loan delinquency rate (loans two or more months delinquent as a percent of total loans outstanding) fell to 0.69% in February from the 0.72% reported one year earlier due to the personal income tax cuts last year. A delinquency rate around 0.75% is considered the “natural delinquency rate,” or the rate due to idiosyncratic life events (divorce, large medical expense, job loss), not due to the business cycle, CUNA Mutual added.
Number of Credit Unions
As of February 2019, CUNA Mutual cited CUNA estimates of 5,583 credit unions ae in operation, down 206 from February 2018. The Trends Report stated the pace of credit union consolidation accelerated to -3.6% in the year to February due to the following factors: retiring baby boomer CEOs, rising regulatory/compliance burdens, low net interest margins, rising concerns over scale and operating efficiency, rising competitive pressures and members’ demand for ever more products, services and access channels.
“There are still more credit unions in the U.S. than banks or savings institutions,” The Trends Report states. “At the end of 2018, there were 4,774 banks and only 703 savings institutions in the U.S. But total assets of the banking industry reached $17.7 trillion in 2018, almost 12 times greater than the $1.5 trillion held by credit unions. We are forecasting the number of credit unions will decline by 180 in 2019.”
Meanwhile, CUNA Mutual reported credit union membership growth “slowed significantly” during first two months of 2019, adding 470,000 new memberships versus the 910,000 reported in the first two months of 2018. In percentage terms, credit union memberships rose 0.28% in February, 0.34% year-to-date and 4.48% during the last 12 months.
“Credit unions should expect membership growth to exceed 3.5% in 2019,” CUNA Mutual said. “This will push the total number of credit union memberships to 122.3 million by year end, which is equal to 33% of the total U.S. population.”
CUNA Mutual said the membership gain was partly driven by the 345,000 new jobs created during January and February, according to the Bureau of Labor Statistics, and by the tremendous growth in credit union indirect auto lending.
“During the last few years credit union membership growth has been highly correlated with job creation with the seasonally adjusted annualized growth rate exceeding 3.5% over the last year,” the Trends Report states. “With job growth expected to slow slightly in 2019 to 2.4 million, we forecast credit unions to pick up an additional 3.8 million members.”
The full CUNA Mutual Trends Report can be found here.