More Jobs in April Trigger Spike in Rates, CUs Selling Loans, Short-Terms Investments

MADISON, Wis. – While April saw the creation of 288,000 jobs, the good news caused a spike in interest rates which led to credit unions selling more loans and buying short-term investments. This, according to the latest CUNA Mutual Group Credit Union Trends Report. The report is based on data from CUNA E&S’s Monthly Credit Union Estimates, the Federal Reserve Board and CUNA Mutual-Business Insight Group Economics Preliminary Spring 2003 Forecast. “To a certain extent, a stronger recovery may be more difficult to manage through than the downturn,” noted Dave Colby, CUNA Mutual’s chief economist, adding the shift could send home shoppers out of the market. Some of the highlights from the report revealed that total credit union assets were $648 billion, up 7.1% over March 2003, but growth continues to slow, Colby said. Membership reached 86 million, “with gains well above trend through the first quarter.” “As the employment outlook improves and the economy builds strength, more people switch core banking relationships,” Colby noted adding, “(combine) this with the expansion in the number of community charters -14 in March alone – and we see a favorable environment to support moderate membership gains in the coming years.” Annual loan growth improved to 10.3% in March, the highest level of annual growth since January of 2001. The increase was supported by “healthy gains” in both consumer installment credit (primarily vehicle loans) and real estate secured loans. These results were achieved despite record volumes of first mortgage loans sold during 2003 and most likely strong sales in the first quarter of 2004, Colby noted. Over the past year, 41% of the annual gain came from first mortgage growth followed by car loans at 37%. “Our preliminary forecast shows total loan growth of 9.5% in 2004,” Colby noted. “While we believe loan originations (both real estate secured and consumer installment credit) will remain strong, higher loan sales throughout the year will dampen overall gains.” At $207.5 billion, CUs have grown their installment credit portfolio by 7.0% over the past year, the best performance since May 2001, Colby noted in the report. “The year-to-date gain of 0.8% is good, given that we usually see seasonal payoffs actually shrinking CUCIC (Credit Union Credit Installment), at least through the first quarter. Currently, credit unions are growing this portfolio segment roughly 200 basis points faster than the rest of the market. This above market growth helped CUs improve their share of this $2 trillion market, by 18 basis points over the past year, to 10.3%,” according to the report. Total vehicle loan growth has supplied over 100% of the annual gain while unsecured and “other” loans declined. Nearly 100% of the YTD increase is also attributable to vehicles, with new loans leading the way at 62%, Colby said. “When we combine new vehicle sales forecasts, relative interest rate levels and consumer sentiment expectations, our 2004 annual growth forecast, of just below 10%, may be conservative,” Colby said. At $21.5 billion, credit unions’ credit card loan portfolios are down 3.9% YTD, a smaller seasonal decline than previous years. On a year-over-year basis, this portfolio is up 3.8%, the best growth performance since August 2001. Even with these improved results, credit cards represent just 5.5% of all CU loans, Colby noted. The CU share of this $748 billion market is holding at 2.9%, dominated by securitized pools with a 52.9% share of all outstanding balances, followed by commercial banks at 32.6%. CUNA Mutual is forecasting annual growth of 4.0% in 2004, “a solid improvement” from the 0.8% generated in 2003. Real estate secured loans have accounted for almost 62% of YTD loan growth and 57% of the gain over the past year, Colby noted. ” We caution (that) March results are prior to the sharp run-up in long-term interest rates triggered by exceptional job gains reports for March and April,” he said. Total real estate secured loans are up 13.4% over the past year and at $175.6 billion, this portfolio segment now equals 44.7% of all loans and 27.1% of assets. “ Even before the increase in interest rates, we saw a change in growth contributors for this portfolio,” Colby said. “Home equity loans are up a strong 20.1% over the past year and adjustable rate first mortgages increased 17.3%. “We expect fixed rate first mortgage portfolio growth to decline further from its 12.6% level as CUs sell more fixed rate loans, preferring to hold adjustable rate paper as interest rates are forecast to rise,” he pointed out. Annual growth for both savings and assets continues to slow as shown and this trend may stall given equity market results over the past few weeks, Colby said. Total credit union assets were $648 billion at the end of March. This reflects annual growth of 7.1% and a 2.9% YTD gain. Given one-year CD yields of 1.66% and regular shares paying less than 0.90%, members remained focused on the preservation of assets through insured deposits and to a lesser extent interest earnings, according to CUNA Mutual. “As of this writing, the equity markets have lost all of their YTD gains. This may trigger a rush of new deposits over the next couple of months,” Colby said. “Our preliminary forecast calls for savings growth to finish the year at just over 7% or slightly above current levels. Assets are forecast to reach $677 billion, an increase of $48 billion (7.6%) in 2004.” In the area of mergers, credit union consolidation picked up sharply in March. NCUA reports 34 mergers during the month, the most since October 2003. Twenty-eight of these mergers were credit unions with less than $10 million in assets with 12 having less than $1 million in assets. There are currently 9,579 CUs, reflecting a net loss of 130 CUs YTD and 394 over the past year. Still, the March 2003 – March 2004 decline is significantly above historical trends, Colby noted. CUNA Mutual’s preliminary forecast for a net loss of 316 CUs in 2004 will likely be revised higher given current results, he added. “While we believe CUNA’s initial estimated loss of 74 credit unions during the month may be a bit high, there is no doubt our marketplace contracted in March,” Colby said. Annual capital growth improved to 8.4% in March and this helped support the capital-to-asset (C/A) ratio at 10.7%, according to CUNA Mutual. “CUs have done a very effective job of managing this key ratio in a narrow range since early 2002,” Colby noted. “This was achieved despite exceptional asset growth and a competitive/economic environment that squeezed gross spreads.” The loan-to-share (L/S) ratio slipped fractionally in March primarily due to a normal seasonal consumer credit payoff cycle. At 69.9%, the L/S ratio is up a “healthy” 223 basis points from March 2003, but down 136 basis points through the first quarter of 2004. CUNA Mutual’s preliminary forecast shows the C/A ratio up slightly by year-end. “We are assuming CUs will continue to manage this ratio in the 10.5% – 11.0% range. This implies a conservative 6.7% annual growth rate for CU capital,” Colby said. “We expect the L/S ratio to climb above 72% by the end of 2004 from a combination of solid loan portfolio growth and reduced deposit inflows later in the year.” [email protected]