CU Magazine: So what we’re seeing is really only a slight improvement. Is there any better news on that front?
Schenk: There is. The overall growth statistics are a little misleading.
Credit unions have been lending like crazy, but a good deal of the activity has been in long-term, fixed-rate mortgages—a lot refinancing activity with market rates near all-time lows. Most of those loans are sold into the secondary market to off-load the interest-rate risk.
So most of this activity isn’t showing up in the portfolio growth. In fact, in 2012 credit unions collectively originated an all-time record $330 billion in loans. That’s a 26% increase over 2011 and a 13% increase over the previous record.
Looking forward, there is a lot of pent-up demand in the marketplace. People have been putting off purchases of big-ticket items like cars and homes. With sustained labor market improvements and higher incomes boosting confidence, many consumers are coming back into the market.
Gently rising longer-term interest rates also are taking many fence-sitters off the sidelines. That all bodes well for the future.
As mortgage refinance activity winds down, purchase money mortgages and traditional consumer lending is picking up some of the slack.
You might be surprised to hear that new auto loan growth has been leading the way recently, with 10.7% growth over the past year. Used auto loans have followed closely, with a 9.2% increase.
CU Magazine: You mentioned high earnings. But didn’t you say interest margins were painfully low?
Schenk: Yes. The new data shows that credit unions maintained a cyclical high in their bottom-line results despite the fact that the difference between the interest income we earn on assets and the dividends we pay depositors—the net interest margin—is at all-time lows.
Comparing the annualized first-half 2013 results to full-year 2012, we see that net interest margins declined 0.15% to 2.75%. Noninterest income also declined marginally, by 0.03% to 1.42%.
However, these declines were offset by a 0.08% drop in operating expenses and a 0.10% drop in loan and lease loss provisions, reflecting continuing adjustments for the fact that allowance accounts are overfunded. Aggregate return on assets thus was unchanged compared to full-year 2012 results at an annualized 0.84% during the first six months of 2013.
CU Magazine: That’s impressive. And seem pretty upbeat about the future. What concerns you in the recent results?
Schenk: The results we typically discuss are aggregate movement-wide results. But there is tremendous variation in most key metrics at the credit union level.
We still have many credit unions, both large and small, that are wrestling with substantial challenges: Membership declines, lack of loan growth, and low earnings.
Recovering. Not recovered. The good news is that the recent data does show that some of that nasty variation is easing.
One quick example: If you dig into the data you’ll find that each of the sand states now reflects a rebound in earnings that puts them back near long-run averages.