2019 Brings Credit Unions Growth & Worries

The nation’s largest credit unions showed strong growth in the third quarter with originations rising only slightly faster than the nation’s smaller credit unions.

Loan balances are growing, but the pace continues to be slower, mirroring the slower growth of the U.S. economy.

Alliant Credit Union of Chicago, Ill., ($12 billion in assets, 483,907 members) is seeing good long-term growth in deposits, loans and members. But next year the credit union plans to be more cautious, President/CEO Dave Mooney said.

“There’s a certain nervousness-anxiety about the economy,” Mooney said. “Some of that is just uncertainty, but there’s no question the economy has slowed. The bigger question is will it continue to slow, and will that turn to recession? If so, when and how deep?”

A NAFCU poll of credit union executives in October showed they were more optimistic on growth and earnings than the previous month or a year ago, but more pessimistic on future loan growth.

According to Callahan and Associates, the nation’s credit unions originated about $400 billion in loans from January through September, 2.8% more than in the first nine months of 2018.

The Washington, D.C.-based consulting company’s Trendwatch report, released Nov. 13, showed real estate loans among all credit unions rose 9.9% to $147 billion in the first nine months of this year, while other loans fell 0.9% to $252.5 billion.

Comparing Callahan’s year-to-date estimates to NCUA figures for all federally-insured credit unions for prior periods, total originations rose 15% for the three months ending in September. Real estate originations rose 35%; other loans rose about 4%.

The Top 10 credit unions, which represent about one-sixth of the movement’s assets and members, showed slightly better overall growth, but the trends were similar: A surge in real estate originations and continued weakness in auto and other non-real estate loans.

NCUA data showed the Top 10 generated $34.1 billion in total originations from July through September, up 16.1% from 2018’s third quarter. Their real estate originations rose 28.2% to $11.8 billion, while non-real estate loans rose 10.6% to $22.3 billion.

The fourth-largest is BECU of Seattle ($21.8 billion in assets, 1.2 million members). It started the year expecting interest rates to continue to rise and loan growth to slow. Instead, rates fell, and BECU’s total loan originations rose 7.3% in the first half and 13.8% in the third quarter of 2019.

“We continue to benefit from the economic recovery: Solid growth, healthy profitability and we’re continuing to build a healthy capital level,” BECU EVP/CFO Melba Bartels said.

The growth has more than offset a modest deterioration in net interest margins as rates have fallen.

“As we look forward to next year, we are not expecting a recession, but we are anticipating the economic growth will slow,” Bartels said.

“It has been a slow-growth recovery, and we are expecting it will continue to slow into next year,” she said. “We are also expecting higher rates. As we look to next year, we expect loan growth will soften somewhat.”

Also, she expects the current low delinquency and charge-off rates will start to rise to more normal levels.

Nationwide, loan quality has remained strong. Callahan found loans 60 days or more delinquent were 0.67% of total loans on Sept. 30, unchanged from a year earlier. Among the Top 10, the delinquency rate rose 11 bps to 1.00%.

Net charge-off rates fell slightly to 0.53% for all credit unions for the first nine months, and rose four basis points to 1.05% for the Top 10.

Mooney of Alliant has also noticed the “extremely benign credit conditions,” and despite the economy’s current health, the credit union has decided to be less aggressive as it goes into 2020.

“We tend to stay off the risk frontier, we tend not to reach for income, particularly when we think conditions might be softening,” he said. “While business trends seem to be pretty good, there seems to be a little bit of nervousness, anxiety.”

Mooney added, “I am a firm believer in the inevitability of cycles. I can’t call the timing of it, but I believe they’re inevitable.”

Auto lending has been slowing for the past four years among credit unions. The latest data from CUNA showed credit unions held $382.9 billion in car loans as of Sept. 30, up 4.1%. Among the Top 10, total car loans reached $43.4 billion as of Sept. 30, up 4.5% – about half the growth rate of their average assets.

Alliant has adjusted pricing to be pickier and take fewer risks in its auto lending.

“We have been intentionally slowing our auto originations. We think auto has gotten a bit overheated, so we’re trying to be a little more cautious in terms of credit,” Mooney said.

Meanwhile, Alliant continues to pursue residential mortgages aggressively.

“While rates have come down, there are still decent returns to be had, particularly with deposit rates coming down a little bit,” Mooney said.

Alliant specializes in adjustable-rate mortgages, most of which it keeps, while selling most fixed-rate mortgages to avoid the interest rate risk.

The Chicago area is Alliant’s biggest mortgage market, but it originates mortgages in most states, with heavy concentrations in California, Florida, Texas and Colorado.

“Our model is boundary-less,” Mooney said. “We have members in all 50 states. We are effectively branchless. Our reach is national.”

Callahan estimated the nation’s credit unions’ annualized returns on average assets was 0.98% for the first nine months of 2019, up two basis points from a year earlier. Among the Top 10, ROA fell two bps to 1.24%. For the third quarter alone, the Top 10’s ROA fell 15 bps to 1.15% as net interest income growth lagged average assets.

Bartels said one of the biggest challenges for credit unions will be figuring out how to deal with their success and deploy the capital they’ve built up.

“We’re no exception to this,” she said. “We continue to invest in growth in our locations and our digital platforms, and providing greater returns to members.”