Credit Union Consumer Installment Credit (CUCIC)

Credit Union Consumer Installment Credit (CUCIC)

Credit union consumerinstallmentcredit balances (auto, credit card and other unsecured loans) rose only 0.6% in October, slowerthan the 1.6% paceset in October 2014, due to a slowdown in auto and credit card lending as consumer confidence levels fell following two months of weak job growth. During the last 12 months, credit union consumer installment credit grew 12.6% (Figure 2) almost twice as fast as the rest of the market.Outstanding consumer credit rose $16.0 billion for all lenders in October,according to the Federal Reserve(Figure 3), but below the $18.9 billion monthly average reported over the last 12 months. The rise in the federal funds interest rate will increase credit card interest rates in the near term and to a lesser extent auto loan rates. This will boost credit union yield on assets and net income.

Vehicle Loans

Credit union newauto loan balances rose 1.1% in October, slower than the 2.4% pace set in October 2014, and increased 16.9% over the last year. On a seasonally-adjusted annualizedbasis, new auto loan balances rose 12.8%in October (Figure 4), down significantly from the 22% pace reported in August 2014.Strong consumer fundamentals are driving auto loan growth: an improving labor market, low interest rates, rising wage growth, expanding driving-age population, improving construction activity, low oil prices and better household balance sheets. The number of new auto loans as a percent of members in offering credit unions – the penetration rate – rose to 4.9% in the third quarter, up from 4.5% one year earlier.

Vehicle sales remained at theseasonally-adjusted annualized sales raterecovery high of 18.2 million unitsin October,10% higher than the 16.5million pace set in October 2014(Figure 5). We expect 2015 to be a record year for new auto sales, coming in at 17.5 million units. There is still some pent up auto demand of around 2.5 million cars and light trucks due to the subpar economic performance during the last 7 years. Expect auto sales to remain at the 17.5 million pace in 2016, and then declining to 17 million in 2017, and 16.5 million in 2018. By 2018, the economy should be to its natural pace of vehicle sales, the natural rate of output, the natural unemployment rate, and the neutral fed funds interest rate.

Real Estate-Secured Lending – 1st Mortgages and Other Real Estate

Credit unionsoriginated a record amount of first-mortgage loans in the first nine months of 2015, 39% faster than the similar time period in 2014 (Figure 6). Credit unions originated $95.3 billion of first mortgages and sold $36.9 billion into the secondary market. Credit unions sold 38.7% of all originations into the secondary market, up from 32.6% in 2014, to reduce the interest rate risk exposure from holding fixed-rate long-term real-estate loans.

In 2015, credit unions originated 8.5% of all mortgage loans in the U.S., up from 4.4% in 2010. The number of first mortgage loans as a percent of members in offering credit unions – the penetration rate – rose to only 2.4% in the third quarter, up slightly from 2.3% one year earlier. This indicates credit unions have a great unfilled opportunity in the mortgage market arena.

The contract interest rate on a 30-year, fixed-rate conventional home mortgage fell to 3.80% in October, from 3.89% in September, and below the 4.04% reported in October 2014. By mid-December, mortgage interest rates rose to 3.95% in anticipation of the Federal Reserve’s interest rate hike. Expect the 30-year mortgage interest rate to increase15 basis points each quarter during the next year, reaching 4.5% by year-end 2016. We don’t expect the interest rate rise to have a significant negative impact on housing demanddue to the still historically low level of interest rates in 2016. Rising interest rates will lead to a pullback in refinancing applications, but improving consumer balance sheets and tightening labor market conditions should boost purchase activity.

Home prices rose 1.0% in Octoberfrom September, according to the Core Logic Home Price Index, and 6.8% year-over-year. The index is now 39% above the low point in March 2011, and only 6% below the peak set in April 2006. Home prices are expected to continue rising over the next couple of years, but at a slightly slower pace than what we are currently experiencing due to housing demand growing faster than housing supply. Housing demand is growing because of a decade low inventory-to-sales ratio for housing, a rising number of household formations and the tightening labor market boosting wage growth and in-turn consumer confidence. Furthermore, access to mortgage credit will increase as financial institutions seek to boost revenue.

Surplus Funds (Cash+ Investments)

Credit union surplus funds rose in October by $12.4 billion due to a $14.7 billion surge in deposits. This deposit surge was caused by October 30th falling on a payday Friday. Credit union surplus funds as a percent of assets rose to 30.6% in October, from 29.9% in September to reach $372.2 billion. The lion’s share of surplus funds (48.2%) are invested in federal agency securities, down from 50.2% at the end of 2014. The second largest surplus funds category, cash deposits in financial institutions, rose from 15% in December 2014 to 15.9% today.

According to third quarter NCUA call report data, 43.5% of credit union surplus funds had maturity dates of less than one year, up from 39.8% in the third quarter of 2014(Figure 7).Meanwhile,investments with maturities in the 5-10 year range fell from 8.6% in 2014 to 7.4% today.The shift to shorter-maturity investments reduces credit unions exposure to falling investment values – price risk – as interest rates rise.However, currently 61% of credit union investments are classified as available-for-sale (AFS), up from 41% in December 2007. AFS securities are exposed to price risk because they must be markedtomarket each month, but this increase in price risk is offset by the enhanced balance sheet repositioning flexibility and investment liquidity that comes with the ability to sell these securities.

Savings and Assets

Credit union savings balances rose1.4% in October, greater than the 1.3% reported in October 2014, due to the month ending on a payroll Friday. Savings balances grew at an 8% seasonally-adjusted annualized growth rate in October due to falling fuel prices and rising household incomes (Figure 8).Asset growth is highly correlated with asset size. Large credit unions (assets > $1 billion) reported assets rising 8.8% in the year ending in the third quarter of 2015, up from 6.7% in the year ending the third quarter of 2014 (Figure 9). Credit unions with less than $20 million in assets reported a 1% increase in asset size in the year ending in the third quarter 2015, up from 0.2% one year earlier.

Credit union cost of funds is expected to rise in 2016 as the Federal Reserve raises the federalfunds interest rate 0.75% to 1%. Credit unions will follow suit and raise interest rates on share certificates and money market accountssimilar to what they did in 1994 and 2004.

Capital and Other Key Measures

The credit union system’s net capital-to-asset ratio rose to 11% in the third quarter, up from 10.9% in the third quarter of 2014,and the highest level since 2007, according to recently released NCUA call report data. Every asset size category reported rising capital ratios over the last year as capital grew faster than assets (Figure 10). One factor driving strong capital growth is the rising loan-to-share ratio. Credit unions now loan out 77.2% of all savings deposits, up from74% in October 2014.

The credit union loan net charge-off rate fell to 0.46% in September, down from 0.47% in September 2014 (Figure 11), which is the lowest charge-off rate since the third quarter of 2007.The charge-off rate historically falls to its lowest level for the year in the third quarter due to rapid loan growth over the summer months. We expect the charge-off rate to increase 5 basis points to 0.51% in the fourth quarter as loan growth slows and delinquent loans rise.

Credit Unions and Members

As of October 2015, CUNA estimates 6,264 credit unions werein operation, down 316from October 2014(Figure 12). Year-to-date the number of credit unions fell by 249, slightly faster than the 215reported inthe first ten months of 2014.NCUA’s Insurance Report of Activity showed 19 mergers were approved in October with an average asset size of $15.5 million. This isdown from the 28 mergers reported in October 2014 with an average asset size of $16 million.

Just released thirdquarter NCUA call report data shows 247 credit unions with assets in excess of $1 billion and 231 credit unions with assets greater than $500 million, but less than $1 billion(Figure 13). The greater than $1 billion asset category represents 4.0% of all credit unions, but more than 57% of the credit union system’s assets and 60% of the loans. The median asset size of a U.S. credit union rose to $26 million, up from $24.1 million in the third quarter of 2014.

Credit union memberships grew a modest235,000 in October, or 0.22%, which is much better than the 57,000 new members, or 0.06%, added in October 2014. October’s seasonal factors typically shave off 0.20 percentage points from the underlying trend membership growth rate. Year-to-date credit unions added 3.9 million new members, (Figure 14), faster than the 2.6 million members added during the similar period in 2014.

Total credit union memberships reached 105.3 million in October, 4.3% more than October 2014 and the fastest pace in more than 20 years.Just released third quarter NCUA call report data showscredit unions with assets greater than $1 billion reported membership growth of 6.4% during the 12 months ending in the third quarter of 2015, slightly faster than the 6.1% reported one year earlier (Figure 15).

* Member Business Loans

This report on key CU indicators is based on data from CUNA E&S’s Monthly Credit Union

Estimates, the Federal Reserve Board, and CUNA Mutual Group – Economics.

To access this report on the Internet:

• Sign in at cunamutual.com
• Go to the “Resource Library” tab
• Under “Publications” heading, select Credit Union Trends Report

If you have any questions, comments, or need additional information, please call. Thank you.

Steven Rick

800.356.2644, Ext. 665.5454

CUNA Mutual Group – Economics

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