Economy is ‘Recovering, Not Recovered’
Despite good news regarding CU membership, lending, and earnings, some CUs continue to struggle.
NCUA’s second-quarter call report data revealed much cause for optimism: substantial increases membership, loan, and earnings growth.
And yet, credit union loans should be growing at double-digit rates judging by previous economic recoveries.
Credit Union Magazine recently asked Mike Schenk, CUNA’s vice president of economics and statistics: What gives?
CU Magazine: NCUA recently released second-quarter call report data. What caught your attention?
Schenk: We haven’t spotted any shocking new developments but we do see a continuation of several key trends and important changes that we’ve been following over the past several quarters. These include a strong, sustained increase in total credit union membership, overall improvement in loan growth, and high earnings.
CU Magazine: Can you give us some context on today’s strong membership growth?
Schenk: Sure. Over the past 20 years, membership growth has averaged 2.1%. In 2003, those growth rates began a fairly steady decline, hitting a low of 0.7% in 2010.
Since 2010, we’ve seen an astounding turnaround with a 1.5% increase in 2011, a 2.1% increase in 2012, and, in the most recent data, a 2.1% increase in memberships in the year ending June 2013.
This might not sound like a huge number. But remember, the U.S. population has been growing at a rate of roughly 0.9%, according to the Census Bureau. That means credit union membership is growing at more than twice the rate of population growth.
It’s clear: More consumers are discovering the credit union difference, and an increasing number of Americans realize that credit unions are their best financial partner.
CU Magazine: That’s an incredible turnaround. What’s causing this shift?
Schenk: There are a number of factors at play. One of the more compelling developments was Bank Transfer Day which, at a certain level, was a reaction to big banks announcing stiff increases in consumer fees.
But on a broader level, membership growth reflects the public’s disgust with the general bad behaviour many banking institutions have displayed—behaviours that ultimately spawned the financial crisis.
Even today, the Chicago Booth/Kellogg School Financial Trust Index shows that 62% of the public trusts credit unions—the highest rating in the financial sector.
In contrast, the index shows just 28% of the public trusts big banks. With a disparity like that, continued growth in membership is a safe bet.
CU Magazine: And loan growth is back?
Schenk: Well, it’s like the overall economy. Recovering, not recovered. Improving—but we’ve got a ways to go to get back to “normal.”
Credit union loans actually declined (-1.2%) in 2010—the first time that’s happened in modern history. Overall, credit union loan portfolios grew by 1.2% in 2011, and by 4.8% in 2012. The new data shows growth of 5.5% in the year ending June 2013.
Looking at previous economic recoveries at this stage, four years into recovery, credit union loans typically grew at double-digit rates. The long-run average annual growth rate in loans is 7.8%, and a bit over 9% if you remove the Great Recession from the average.
NEXT: Better news ahead?
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.