CU Financials Show Improvement

Mortgage balances are growing and delinquency ratios are dropping.

September 1, 2012
With the backdrop of a decelerating economy in the first half of 2012, credit unions reported improving financial results as loan growth accelerated, earnings improved, and credit quality increased.

Credit unions reported return on assets of 74 basis points (bp) of average assets for the first six months of the year—slightly higher than the 68 bp reported for all of 2011. Most of the increase in earnings was due to decreasing loan loss provisions because of falling loan charge-offs and delinquencies.

CUNA’s economists expect earnings to reach 80 bp of average assets for 2012 and 90 bp of average assets next year, despite actions from the Federal Reserve flattening the yield curve and squeezing credit union net interest margins.

During first-half 2012, credit union loan balances increased 1.4%, up from the 0.4% decline in loan balances reported in first-half 2011.

Falling interest rates have led to a mortgage refinance boom, and even an increase in purchase mortgage originations, as members take advantage of record low market interest rates. This led to a 3.1% increase in fixed-rate mortgage loan balances at credit unions during first-half 2012 compared with a 2.24% increase for the same period last year.

Mortgage balances are growing faster this year, despite credit unions selling off 52% of all originations into the secondary market—up from 46% sold off in 2011. Home equity and credit card loan balance growth, however, have been a drag on overall loan growth—declining 4.7% and 2%, respectively, as households continue to deleverage by paying down debt.

Credit unions reported a significant drop in their loan delinquency ratios, as consumer balance sheets continued to improve. Delinquency rates fell from 1.6% in December 2011 to 1.32% in June 2012. Unfortunately, this is still significantly higher than the 0.53% delinquency rate reported in April 2006.

The significant drop in the delinquency ratio for first-half 2012 was caused by the dollar amount of delinquent loans falling 16.5%, while total loans increased 1.4%. We expect delinquency rates to fall below 1.2% by year-end, as the unemployment rate continues to decrease, albeit at a very slow pace.

In the face of a weakening economy, the Fed recently chose not to take additional monetary action to spur the aggregate demand of households and businesses. Any additional expansion of the monetary base faces the law of diminishing returns regarding additional economic growth.

During first-half 2012, Fed policies—quantitative easing and operation twist—have flattened the yield curve, so most credit unions have experienced lower net interest margins. For the first time in history, credit union net interest margins fell below 3% of average assets, as asset yields fell faster than funding costs.

Credit union cost of funds is now below 0.75% and trending near 0%, as maturing share certificates reprice into today’s historically low interest rates. But credit union yield on assets—now below 3.75%—is falling faster, as old loans reprice.

Though the Fed announced it expects to keep short-term interest rates very low through late 2014, many in the financial markets now expect it to wait until 2015 or later.

Credit unions might as well settle in and get used to the historically low interest rates for the next three years.

STEVE RICK is CUNA’s senior economist. Contact him at 608-231-4285.