CREDIT UNION TRENDS REPORT

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CREDIT UNION TRENDS REPORT CUNA Mutual Group Economics November (September Data) Highlights During September, credit unions picked up 7, in new memberships, loan balances grew at a.

Third quarter economic growth came in at 3.%, but only increased.3% from the third quarter of.

1 CREDIT UNION TRENDS REPORT CUNA Mutual Group Economics November (September Data) Highlights During September, credit unions picked up 7, in new memberships, loan balances grew at a.7% annualized pace, while savings balances rose at a.% annualized pace. Firms hired 1, workers, nominal consumer spending increased 1.% and long-term interest rates decreased 1 basis point. Third quarter economic growth came in at 3.%, but only increased.3% from the third quarter of. At the end of September, CUNA s monthly estimates reported, CUs in operation, down 1 credit unions from one month earlier. Year-over-year, the number of credit unions declined by 33, less than the 7 lost in the months ending in September. Total credit union assets rose 1.% in September, faster than the.% gain reported in September of, due to the month ending on a payroll Friday. Assets rose.% during the past year due to a.7% increase in deposits, a.% increase in borrowings and a.% increase in capital. The nation s credit unions increased their loan portfolios by.7% in September, less than the.% pace reported in September. Loan balances are up 1.% during the last months. September is historically the month where seasonal factors have little to no effect on trend loan growth. Credit union memberships rose a robust.3% in September, but down from the remarkable.1% gain reported in September. Memberships are up.7% during the past year due to robust demand for credit, solid job growth and comparatively lower fees and loan interest rates versus the banks. Credit union capital-to-asset ratios were 1.7% in September, the same ratio reported one year ago. Credit union loan delinquency rates fell to.7% in September, down from.77% one year earlier due to a stronger economy and double digit loan growth. Expect both credit unions and banks to loosen credit standards in 1. ECONOMIC, COMPETITIVE AND INTEREST RATE ENVIRONMENT During September, the economy gained 1, jobs, the unemployment rate fell to.%, nominal personal income rose.%, nominal personal spending rose 1%, the savings rate fell to 3.1%, consumer prices rose.%, consumer confidence rose, new home sales rose 1%, existing home sales rose.7%, auto sales rose %, home prices rose.% and the 1-year treasury interest rate fell 1 basis points to average.%. As we move to the beginning of 1, the economy is expected to report abovetrend growth of.3% next year with the economic expansion broadening from consumer spending to capital expenditures and exports. This will push the economy beyond what economists consider to be its potential or normal rate of production. This should normalize core inflation towards the Federal Reserve s target of %. Expect the unemployment rate to fall to % in 1, which will shift wage bargaining power from employers to employees, and push wage growth over 3.%. This will signal the labor market is beyond full employment where everyone who wants a job can get a job; but may require relocation for some. Total Credit Union Lending Credit union loan balances rose.7% in September, slower than the.% pace reported in September. Driving overall loan growth was strong growth in unsecure personal loans (.%), fixed-rate first mortgages (1.%), second mortgages (1.3%) and new-auto loans (1.1%). Credit union loan-to-savings ratios are expected to reach.% at year s end due to loan growth exceeding deposit growth. This will be the highest ratio since the beginning of the Great in December 7, (Figure 1). Loan-tosavings ratios peak right before recessions and may contribute to the economic slowdown that follows due to tight liquidity from credit unions reducing their pace of lending and high levels of member s debt reducing their demand for loans. Based on current trends, credit union lending growth could slow slightly to.% while savings balances increase only %. This will raise the average loan-tosavings ratio to.1% at year s end 1, the highest ratio since May 1. Figure 1: Loan-to-Savings Ratios

2 $ bil (SA) Credit Union Consumer Installment Credit (CUCIC) Credit union consumer installment credit loan balances (auto, credit card and other unsecured loans) rose 1.1% in September, faster than the.7% pace set in September. During the last months, credit union consumer installment credit grew.% (Figure ). According to the Federal Reserve, outstanding consumer credit rose a large $. billion for all lenders in September (Figure 3), with balances up.% over the last year. Consumer credit is rising due to strong job growth, rising wages and improved household wealth from rising stock and home prices. Figure : Figure 3: Loan Growth Trends September Consumer Credit Outstanding (monthly change & annual growth rate,sa) 3 Total Loans Consumer Installment Credit (CUCIC) Real Estate Secured Loans 1.% %.% Consumer Credit Monthly Change (RHS) Year-over-Year Growth (LHS) Vehicle Loans Credit union new-auto loan balances rose 1.1% in September, slightly below the 1.% pace set in September. Newauto loan balances rose.% during the last months, (Figure ), faster than the.3% increase in used-auto loans. Total auto loan balances rose.7% since September, which is faster than overall loan growth and in turn lead to auto loans making up 3.% of the credit union loan portfolio, the highest since April 7. The strong auto sector is being driven by solid household financial fundamentals, including: robust job creation, better job quality, low interest rates, accessible auto credit, rising wage growth and improving household balance sheets. Figure : Figure : 1-1 Vehicle Lending Growth Comparisons Annual Growth September CU New vs. Used Vehicle September.7% - 1 New.% Used.3% Millions of Units 1 U.S. Vehicles Sales Seasonally Adjusted Annual Rate New Auto Sales 1 Inherent Demand Auto Sales Forecast Vehicle sales rose to a 1. million unit seasonally-adjusted annualized sales rate in September (Figure ), up from.1 million in August and above the. million sales pace set in September, due to replacement vehicle sales after Hurricane Harvey and Irma. These strong sales numbers are above the. million annual sales pace considered by economists to be the inherent demand for the U.S. auto sector (see orange line in Figure ). Record stock prices in November should support auto sales since stock sales are often used for vehicle purchases. Moreover, the strengthening construction sector and low gas prices should support the light trucks sales for the next year. 1 1 Source: Autodata Corp Credit Union Trends Report

3 Real Estate Secured Lending 1 st Mortgages and Other Real Estate Credit union fixed-rate first mortgage loan balances grew a strong 1.% in September, similar to the 1.7% pace set in September, due to existing-home sales rising.7% from August. Adjustable-rate mortgage loan balances fell -1.% in September, below the.% pace recorded in September. Home equity lending balances were unchanged in September, which is better than the -1.% drop reported in September. Seasonal factors typically shave.1 percentage points from the underlying monthly trend growth rate in September, so the September no change in balances indicate credit union members are willing and able to tap into their home equity to satisfy some of their borrowing and spending needs. The contract interest rate on a 3-year, fixed-rate conventional home mortgage fell to 3.1% in September, from 3.% in August, but above the 3.% reported in September. With rising inflation expectations and a tightening labor market, we expect the 3-year mortgage interest rate to increase to basis points during the next year, reaching.% by the end of 1. Rising interest rates will lead to a pullback in refinancing applications, but improving consumer balance sheets and tightening labor market conditions should boost purchase mortgage activity. Home prices rose.% in September from August, according to the Core Logic Home Price Index, and 7.% year-overyear. The index is now above its previous peak set in April during the housing bubble. The OFHEO House Price Index rose.% over the last year ending in the second quarter (Figure ). Some people are wondering if home prices are becoming overvalued again and therefore creating another home price bubble. One way to measure overvaluation is to compare today s home price-to-income ratio and home price-to-rent ratio to their historical averages. The home priceto-income ratio is % below its historical average, indicating no price bubble, but the home price-to-rent ratio is 7% above its historical average, which indicates some valuation issues. If we take an average of these two numbers, however, we see that current home prices are only % overvalued compared to historical norms. In other words, no price bubbles yet exist nationwide. Figure : Figure 7: 1 - OFHEO House Price Index (-Qtr Change) U.S CU Surplus Funds (Cash + Investments) Loan-to-Asset (Left Axis) % % Surplus Funds (Cash + Investments) Credit union liquidity fell to the lowest level since December in September as loan growth outpaced asset growth. Credit union surplus funds as a percent of assets declined to.% in September, (Figure 7), down from.% one year earlier, due to asset growth (.%) outpacing surplus funds growth (-.%). Credit union borrowings rose.% over the last year, $.7 billion, due to loan demand outpacing saving supply. Credit union borrowings as a percent of assets stands at 3.%, below the.% set back in the first quarter of. Loans rose to.% of assets in September, the highest level since December (Figure 7). Currently.1% of credit union surplus funds have a maturity of less than one year, up from 7.1% in June. This shift towards shorter maturity investments could be due to credit unions expecting the Federal Reserve to continue raising interest rates in December and on through 1 and 1. The shift to shorter-maturity investments will reduce credit unions exposure to falling investment values as interest rates increase, but this interest rate risk reduction comes at a cost, specifically an opportunity cost, or what is given up. Currently, the 3-year treasury notes have yields roughly 3 basis points above overnight money. This opportunity cost is, in effect, an interest rate risk insurance premium. 7% 73% 7% % % 3% % % % 3% Surplus Funds-to-Assets (Right Axis) % 3% 3% 3% 3% 3% % % % % 3 Credit Union Trends Report

4 Savings and Assets Credit union savings balances rose 1% in September, but less than the 1.% gain reported in September, due to the month ending near a payday Friday. September, however, is typically a weak month for savings growth due to seasonal factors such as back-to-school shopping and college tuition payments. Savings balances rose.7% during the last months due to the windfall gain from falling gas prices, rising credit union memberships and stronger job growth. Credit union cost of funds is expected to rise 1 basis points in 1 as the Federal Reserve raises the Fed Funds interest rate.7%. Credit unions will follow suit and raise interest rates on share certificates and money market accounts similar to what they did in 1 and (Figure ). Members behavior will also contribute to rising funding costs as they move deposits from low-cost regular shares to higher-cost share certificates (Figure ). This is known as the mix effect. Figure : Figure : 7 Deposit Interest Rates versus Fed Funds Fed Funds Regular Shares MMAs CDs Savings Distribution U.S. Credit Unions Certificates Share Drafts MMAs IRAs Regular Shares Capital and Other Key Measures The credit union system s capital-to-asset ratio fell to 1.7% in September, down from 1.% in August, due to a surge in deposit growth because of the month ending on a payroll Friday (Figure 1). The capital ratio is identical to what was reported in September due to asset growth of.%, equaling capital growth. The credit union loan-to-share ratio rose over the last year to.1% from 7.% due to loan growth outpacing savings deposits. On time payment performance of loans is improving in tandem with the labor market. The loan delinquency rate (loans two or more months delinquent as a percent of total loans outstanding) fell to.7% in September, down from.77% in September, as the unemployment rate falls below what economists now believe is the full employment rate of.7% (Figure ). This is leading to credit unions relaxing lending standards by going further down the credit spectrum. Figure 1: Figure : Credit Unions and Members As of September, CUNA estimates, credit unions were in operation, down 33 from September (Figure 7 7 Credit Union Key Ratios September Loan-to-Share (Left Scale) Capital-to-Asset (Right Scale)..1% 1.7% Unemployment (Left Axis) Loan Delinquency Rate (Right Axis) CU Delinquency Rate Versus Unemployment Rate.7% Natural Delinquency Rate (Right Axis).7% Full Employment Target (Left Axis) Credit Union Trends Report

5 Basis Points ). Year-to-date the number of credit unions fell by 3, slightly more than the reported in the first nine months of. NCUA s Insurance Report of Activity showed 1 mergers were approved in September, with an average asset size of $1.7 million. This is down from the mergers reported in September, with an average asset size of $. million. Seventeen of the mergers this September were due to credit unions wanting expanded services, and one merger was due to lack of growth. The pace of consolidation continues in both the credit union and banking industries. The number of FDIC-insured banks fell by 71 during the last months ending in June. This leaves a grand total of,77 banks in operation, fewer than the total number of credit unions. This consolidation is eliminating the excess capacity in the financial services space, cutting duplication of operating costs, culling layers of overlapping management and allowing for scale to squeeze better deals from suppliers. This consolidation trend will lead to larger and more efficient depository institutions with lower operating expense ratios (Figure ) and a more competitive financial services industry. Figure : Figure : 3 1 Comparison of Declines in # of CUs September Actual =, Number of CUs Credit unions added more than 3. million memberships in the first nine months of, the fastest pace in credit union history (Figure ), and significantly above the 3.3 million added in the similar time period of. Surging demand for credit was the major driver for the upwelling in memberships. Credit union loan balances increased $7. billion in the third quarter, above the $. billion in the third quarter of. Also driving membership gains was the 3, new jobs added to the U.S. economy in the third quarter. Credit union memberships grew at a.% seasonally-adjusted annualized growth rate in September the fastest pace in years (Figure ). We expect membership growth to remain strong in 1, but slow to a more sustainable pace of 3.% to %. Figure : Figure : 7 YTD September Declines Annual Declines September to September Annual Declines Credit Union Operating-Expense-to-Assets (by Asset size) < $ mil $-$ $-$1 $1- $ Q YTD Annualized Q YTD Annualized 3 3 $- $ 37 3 $-$1 bil 7 73 >$1 bil Members ( s) Month-Only Membership Gains Million YTD September = 1. Million Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 3. Million YTD 7.%.%.%.%.% 3.% 3.%.%.% 1.% 1.%.% CU Membership Growth Seasonally Adjusted Annualized Growth Rate.% %.%.%.%.% 3.% 3.%.%.% 1.% 1.%.%.% Credit Union Trends Report

6 National Monthly Credit Union Aggregates CAPITAL/ ($ Billions) (Millions) CREDIT LOAN / ASSET YR/MO LOANS ASSETS SAVINGS CAPITAL MEMBERS UNIONS SAVINGS RATIO 77. 1,3. 1,.3.., ,1.7 1, , ,. 1,. 1.., ,7. 1,3.3.., ,3. 1, , ,. 1,. 3.., ,. 1,71..., ,7. 1,..., ,73.3 1,7..., ,7. 1, , ,.3 1,..., ,1. 1, , ,31. 1,.1. 1., ,37. 1,.. 1., ,3. 1, , ,3.7 1,1.. 1., ,33. 1,.. 1., ,3. 1, , ,33. 1,..1., ,37. 1,. 3.7., ,3. 1, , ,37. 1, , ,37. 1,..7 1., ,37. 1, , ,3. 1,.. 1., Credit Union Growth Rates Change Previous Year # OF CUs Delinquency YR/MO LOANS ASSETS SAVINGS CAPITAL MEMBERS # OF CUs DECLINE Ratio* (.) (3).77% (.) (3).7% (3.) ().% (.) (77).% (.1) (7).% (3.7) (1).7% (3.) ().7% (.) (7).7% (.) ().7% (.) (71).7% (3.7) (3).77% (.) (7).77% (3.) (7).7% (3.1) (1).77% (3.) (1).% (3.) ().7% (3.) ().% (3.) ().7% (3.) ().% (3.) ().73% (.) (1).7% (3.) (1).7% (3.) (31).7% (3.) (31).7% (3.) (33).7% * Loans two or more months delinquent as a percent of total loans. Credit Union Trends Report

7 Distribution of Credit Union Loans Estimated $ (Billions) Outstanding 1 ST TOT. OTHR TOTAL TOTAL NEW USED TOTAL UNSEC CREDIT MORT MORT REAL YR/MO LOANS VEHICLE LOANS Ex. CC S CARDS CUCIC TOTAL ND +HE ESTATE MBLs* * Member Business Loans CUCIC = Total Loans Total Real Estate - MBLs CUCIC = Total Vehicle Loans + Unsecured Loans + Credit Card % of MBLs Distribution of Credit Union Loans Change From Prior Year 1 ST TOT. OTHR TOTAL TOTAL NEW USED TOTAL UNSEC CREDIT MORT MORT REAL YR/MO LOANS VEHICLE LOANS Ex. CC S CARDS CUCIC TOTAL ND +HE ESTATE MBLs* Credit Union Trends Report

8 1 7 Annual Growth Rates Total Loans & Installment Credit CUCIC Total Loans $ in Billions CU Loan Portfolio $.1 $.3 $7. $.1 $. $7. $.1 $.1 7.% $7. 1.% 1.%.% 1.%.1%.7%.3%.%.3%.% 7 1 Sep CIC Other $7. $. $. $. 7.3%.7% CIC Share of Total Loans at Credit Unions $ Billions Consumer Installment Credit at Credit Unions 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.3., Ext.. steve.rick@cunamutual.com CUNA Mutual Group Economics CUNA Mutual Group, All Rights Reserved. CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company, a mutual insurance holding company, its subsidiaries and affiliates. Credit Union Trends Report

CREDIT UNION TRENDS REPORT

CREDIT UNION TRENDS REPORT CUNA Mutual Group Economics December (October Data) Highlights During October, credit unions picked-up, in new memberships, loan balances grew at a.% seasonallyadjusted annualized