Mike Schenk

CU financials are ‘simply amazing’

The current economic recovery is in its 96th month, with no end in sight.

August 22, 2017

NCUA recently released first-quarter financial and operating results for U.S. credit unions—and the results are amazing.

Although U.S. economic growth slowed in the first quarter, consumers remain upbeat and engaged.

Healthy labor markets are fueling personal income gains, boosting confidence, and creating solid increases in retail sales and housing purchases. Still, the Federal Reserve remains cautious, and market interest rate increases have been (and likely will remain) modest.

Against that backdrop, U.S. credit unions reported increasingly strong membership growth, solid loan growth, higher asset quality, and healthier earnings in the first quarter of 2017.

Overall, credit unions report a 1.2% increase in total memberships in the first quarter—slightly faster than the 0.8% increase seen in the fourth quarter of 2016. The annualized 4.8% first-quarter increase in memberships continues to greatly exceed the nation’s 0.69% full-year 2016 population growth.

Memberships increased 4.2% in the year ending March 2017, slightly higher than the 4.1% full-year 2016 growth rate.

When compared with previous calendar-year results, these increases represent the strongest gains in 30 years. U.S. credit unions report 109.4 million memberships—roughly one-third of our population.

U.S. credit union loan portfolios grew 2% during the first quarter of 2017, an 8% annualized pace. That’s slower than the 2.7% fourth-quarter 2016 result but in line with the first-quarter 2016 gain of 1.7%.

The slowing was expected, and it reflects normal seasonal variation as consumers pay down holiday debt.

Year-over-year results were impressive, however, with overall loan growth of 10.8%, up slightly from the 10.6% gain in 2016. The 2016 tally was the strongest since 2005, when credit unions reported a 10.7% jump in loan balances.

Looking forward, expect solid loan portfolio growth even though short-term interest rates have resumed their modest march higher.

Asset quality also improved in the first quarter. Delinquency rates declined markedly, from 0.83% at year-end 2016 to 0.69% at the end of March 2017.

The net charge-off rate inched down from an annualized 0.6% in the fourth quarter of 2016 to 0.58% in first-quarter 2017, which is still higher than the cyclical low of 0.5% in the second quarter of 2016.

Strong loan growth in the coming months signals further near-term improvement in these metrics.

Savings growth was especially strong in the first quarter, rising 4.4% (a 17.6% annualized increase). Tax refund deposits combined with the quarter ending on a payday helped boost that number.

As a result, the aggregate credit union loan-to-savings ratio declined marginally, from 79.5% to 77.6% in the three months ended in March.

Credit unions reflect ample liquidity to deal with expected flows into money market mutual funds, which typically occur as market interest rates drift up.

Loan growth continues to boost earnings. U.S. credit unions reported annualized ROA (net income as a percentage of average assets) totaling 0.71% in the first quarter.

That was essentially unchanged from the 0.72% result in the fourth quarter and marginally lower than the 0.75% posted in the first quarter of 2016. Earnings have averaged 0.62% over the past decade.

Strong asset growth caused the credit union capital ratio to decline marginally in the quarter to 10.7% from 10.9% at the end of 2016. Still, this is well above the 7% threshold level at which regulators deem credit unions “well capitalized.”

The duration of post-World War II economic recoveries has averaged 59 months. The current recovery is in its 96th month, with no end in sight. These trends were largely in line with CUNA economist expectations.

More important, recent economic developments remain broadly supportive of additional significant gains in loan and membership growth going forward. And that’s simply amazing.

MIKE SCHENK is CUNA’s vice president, research and policy analysis. Contact him at 608-231-4228.