Loan Originations Drop in First Quarter for CUs

Credit union originations fell 3.2% in the first quarter as fewer members sought mortgages and car sales continued to soften, according to Callahan & Associates, a credit union consulting firm in Washington, D.C.

Callahan’s quarterly Trendwatch report found credit unions originated $114.1 billion in loans during the three months that ended March 31, down from a record $117.9 billion in 2018’s first quarter.

“This is the first contraction in credit union originations we’ve seen since 2014,” said Sam Taft, Callahan’s assistant vice president for analytics and business development.

A $4.7 billion drop in first mortgages dragged the total into the red. Credit unions originated $26 billion in first mortgages in the three months ending March 31, down from $30.7 billion in 2018’s first quarter and the lowest first-quarter crop since 2014’s $17.5 billion.

The decline was across all segments: fixed, balloon and adjustable rates.

And while credit unions have been gaining share against banks in loans for cars and other consumer credit, credit unions’ share of first mortgages fell from 9% in 2018’s first quarter to an 8% share in this year’s first quarter.

In the fourth quarter, the increase in car loans was enough to make up for losses in real estate. By the first quarter, gains from cars and other consumer loans were no longer enough.

Consumer originations rose only 1.4% in the first quarter, compared with 7% growth from 2017’s first quarter to 2018’s first quarter.

“We’re seeing a gradual slowing of the automotive portfolio,” Taft said.

The pattern for all credit unions was reflected in results for the top 10 credit unions, which early this month reported $25.9 billion in total loans originations during the three months that ended March 31, down 1.7% from 2018’s first quarter. Their real estate originations fell 14.7%, while others rose 3.8%.

The movement-wide drop in originations resulted a further slowing of loan portfolio growth, especially since credit unions essentially maintained their level of first mortgage sales to the secondary market, leaving a smaller portion in their portfolios.

Credit unions held $1.06 trillion in loans as of March 31, up 8% from a year earlier. The growth rate slowed from 9.7% for the 12 months ending March 31, 2018, and from the 10% to 11% range that prevailed after 2014.

The $5.9 billion 12-month gain in the portfolio was the smallest dollar increase in more than five years, but Taft said credit unions need to recall that conditions have been worse.

“We have to take a step back, and point out 8% is a really strong growth rate for the loan portfolio,” Taft said.

There are also brighter trends.

Member engagement continues to rise. Members held an average loan balance of $8,395 at March 31, up from $7,998 a year earlier, and the average member share balance was $10,752, up from $10,588 a year earlier.

At March 31, 69.1 million members had a share draft account, or 58.1% of all credit union members. That penetration was up from 57.3% a year ago, and 53% five years ago.

Also, loan quality remains good. The net charge off ratio plus delinquency ratio is down from a year ago. It was 1.16% at March 31, down from something a tad higher a year earlier and down from 1.31% March 31, 2014.

And finally, returns on average assets continue to rise. ROA was 0.94% in the three months ending March 31, up from 0.90% in 2018’s first quarter. Higher interest rates were the main driver of income growth.

But whatever margin credit unions may be making on the books, they will need to plow back much of it into operations and employee skills to keep up with rising member expectations.

“It’s now more important than ever for credit unions to invest in technology, products and services for members and their employees,” Taft said.