A Deeper Look Into The Numbers At Mid-2011 Finds 'Challenges'

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MADISON, Wis.-A report examining credit union trends at mid-year 2011 finds the picture strongly resembles that of mid-year 2010.

In its June 2011 Trends Report, CUNA Mutual noted, "A year ago we stated, 'While many point to signs of economic recovery, member perceptions and actions (lack of demand for new loans) point to continued economic challenges. Not much has changed in a year."

Dave Colby, CUNA Mutual's chief economist, noted in his analysis that "Member economic uncertainty has increased over the past year, according to my informal polls of CU leaders throughout the country. The perceptions of CU leaders have also eroded since April 2010. Lack of consumer loan demand (except for refinances), extreme regulatory uncertainty, looming cuts to non-spread revenue sources and continued erosion in the housing market are concerns cited most often. Considerable challenges will continue through 2011 and well into 2012."

Among the findings CUNA Mutual's Trends Report:

Total Lending
The collective loan portfolios of the nation's CUs are down 0.9% YTD and 0.7% on an annual basis. This is the 15th consecutive month of year-over-year declines and at $575 billion; total loans outstanding at CUs are down $15 billion (2.5%) from their peak in October 2009, the Trends report stated.

On a YTD basis, the only portfolio segments posting positive results are used vehicle loans (0.7%), adjustable-rate 1st mortgages (4.9%) and member business loans (1.7%). On a year-over-year basis, the gains in used vehicles, credit cards, fixed and adjustable-rate 1st mortgages and member business loans were not enough to offset the declines in other portfolio segments, especially new vehicles and 2nd mortgages, CUNA Mutual said.

"We are not forecasting any significant changes in economic and environmental factors such as consumer spending on big ticket items or relative interest rate levels," wrote Colby. "Thus the CU industry will struggle to generate positive growth in 2011. Detailed Q1 2011 data shows 4,455 CUs (60% of all CUs) reported year-over-year loan portfolio declines. Included in this group were 90 CUs with assets above $1 billion."

Consumer Installment Credit
The good news, according to CUNA Mutual, is that CUs increased consumer installment credit (CIC) in April by $2.8 billion (1.3%). The bad news is this combined portfolio is down 2.4% over the past year. The rest of the market also posted a gain in April and is now up 0.9% on a year-over-year basis. Specifically:

• Used vehicle and "other" (most likely student loans) were the biggest contributors to April's positive result.

• CU credit card balances are off 4.5% from their seasonal peak, but up 1.3% since April 2010. The rest of the market is down 5.7% from its seasonal peak and 5.2% year-over-year.

• The CU share of the $2.4-trillion CIC lending arena is now 9.2%, down from 9.5% a year ago, CUNA Mutual said. The CU share of the $820-billion credit card market has increased to 4.5%, up from 4.2% at this time last year.

• "We remain pessimistic about growth prospects for CUs in 2011 as consumer anxiety regarding employment and energy costs will cause cautious spending and finance activity," Colby wrote. "Consumer deleveraging will continue."

Vehicle Loans
For the first time since mid-2009 (Cash for Clunkers), CUs posted a month-only gain in total vehicle loans. Although one month does not make a trend, it is positive. The one month gain reduced year-over-year contraction to 3.4. A slow-down in the rate of contraction is not growth, the Trends report stated. Specifically:

• The new vehicle loan portfolio is down 4.2% YTD through April and 13.9% since April 2010. Five years ago, new vehicle loans equaled 18.1% of all CU loans. Today the share is 10.7%.

"This is more than an economic cycle issue; it is a structural change in the financing of new vehicles and needs to be addressed at all levels of the industry," Colby wrote. "Looking forward, given the uncertainties in vehicle supply (Japan supply chain effect), energy costs and most importantly employment recovery, our forecast for new vehicle sales remains muted as consumers defer major purchases. The used vehicle loan portfolio is up fractionally YTD and up 4.1% over the past year. It is the second strongest component of total loan growth."

Colby added, "We are forecasting annual growth in total vehicle loans to average less than 2% over the next three years."

Real Estate-Secured Lending
Total real estate secured (RE) loans are down 0.6% YTD and down 0.1% over the past year. Even with these declines, this portfolio segment now equals almost about 55% of total loans and 33% of assets. The Trends Report noted:

• Despite continued serious challenges in the housing and housing finance sectors, Q1 2011 data shows 1st mortgage originations as a strong positive for CUs. At $17.8 billion, 1st mortgage origination activity increased 25% over a strong 2010. This implies CUs helped member households take advantage of favorable interest rates and improve cash flow or their balance sheets (most likely both). 1st mortgage loan sales remain strong. The $8.9 billion sold in Q1 2011, equaled 50% of all loans originated.

• Currently, the strongest growth component is adjustable-rate 1st mortgages up 4.9% YTD and 5.7% over the past year. Fixed-rate 1st's, home equity loans and 2nd mortgages are all down on a YTD basis.

• Given our outlooks for interest rates, home prices and underwriting standards, we have likely seen the peak in refinance and purchase money origination volumes. "Looking forward, we see significant downside risks and unknowns in real estate finance," Colby said.

Surplus Funds
At almost $362 billion, surplus funds are up 13% ($42 billion) in the first four months of 2011 and 15% ($47 billion) since April 2010. CUNA Mutual's Trends Report noted that due to the lack of loan demand (or CUs choosing not to hold low-yielding fixed-rate, long-duration assets), the share of assets in surplus funds climbed above 37%. This reflects 3.4% more assets earning an average investment yield of 1.65%, according to NCUA Q1 2011 data. Current yields, especially short durations are significantly lower.

"Taking into account cost of funds, assessments and expenses, at the margin, the net spread earned on surplus funds barely contributes to the bottom line."

Savings and Assets
Total savings climbed 0.7% in April, bringing the YTD gain up to 3.7%. At $834 billion, savings are up $35 billion (4.4%) since April 2010. "Current results continue to be well below historical trends and certainly below what we would expect given the high levels of economic and employment uncertainty," Colby wrote. In addition:

• Current results are the byproduct of actions by CUs and members. CUs continue to offer historically low deposit yields (1-Year CDs = 1.17%, regular shares 0.34% and money market accounts 0.55%) to dissuade large deposit inflows (manage the capital ratio) and keep the cost-of-funds low, given that 37% of all assets are in cash or lower-yielding investments.

• From a member perspective, households are rational and will continue to pay down higher-cost debt obligations versus build savings, which are losing ground to inflation, the report suggests. CUNA Mutual's forecast anticipates these CU and member actions will not change through at least the end of 2011. "We are closely monitoring member savings inflows and see a strong preference for highly liquid accounts (regular shares, money market accounts and share drafts). Since April 2010, more than 128% of the total savings increase was accounted for by liquid deposit accounts. CDs (25.6% of savings) fell 5.2% ($11.7 billion) since April 2010."

• At $968 billion, CU assets rose 0.9% in April, with a YTD gain of 3.6% and annual growth of just 4.6%. Not all CUs are generating asset growth. Detailed NCUA data from Q1 2011

Capital and Other Key Measures
Despite capital growth climbing to 5.7% (pre-assessment) and a 74 basis point (bp) ROA (Q1 2011 NCUA data annualized), the CU capital-to-asset (C/A) ratio held at 9.9% for the third consecutive month. The Trends Report notes that at its current level, the industry as a whole remains financially strong. Digging deeper into detailed Q1 data reveals 178 CUs with a capital level below the NCUA's 6.0% "well-capitalized" threshold. These CUs hold just 1.8% of industry assets. This is an improvement from Q1 2010 when the below 6.0% count was 191 CUs holding roughly 3.0% of industry assets.

Other notes related to key measures:

"Our current forecast assumes CUs will closely manage this key safety and soundness measure in the 9.7% - 9.9% range," Colby said. "This may prove to be challenging given bottom-line negatives from assessments and income reductions from the debit interchange cap."

• Growing loans continues to be CUs' greatest challenge. The loan-to-share (L/S) ratio declining to 69.0%, down 322 BPs YTD and 351 BPs since April 2010. "Without larger contributions from lending spreads, bottom-line growth is constrained. We are not forecasting much improvement in the L/S ratio by year-end, nor in 2012," the report states.

• "Again we believe near-term improvements in credit conditions are supporting bottom-line growth, but will be offset by squeezes on income and assessments."

• The trend of modest improvements in the loan delinquency rate (loans two or more months delinquent as a percent of total loans) may be interrupted as a new wave of home value declines is occurring and the unemployment rate has recently moved up, the Trends report predicts. At 1.579%, this key credit quality indicator improved 15 BPs over the past year.

• Data show 2,075 CUs (28% of all CUs) posting asset declines over the past year. Included in this group are 30 CUs with assets of more than $1 billion.

Credit Unions and Members
The rate of CU marketplace consolidation picked up in April according to initial estimates by CUNA Economics and Statistics and the NCUA. Industry consolidation in March and April came in at 50 CUs. Through the first four months of 2011, the CU count is down by 77, just slightly above the consolidation pace experienced over the past four years, CUNA Mutual noted.

At 7,520, the CU count is down 241 since April 2010. "Economic and consumer financial services environmental trends and issues tell us consolidation should rapidly accelerate, but our forecast for 2011 and into 2012 shows only a modest pick-up," CUNA Mutual's Colby said. "While market and regulatory stresses hit the 3,900 CUs with assets under $20 million hardest, in many cases the urgency to merge is lessened by high net worth. The average net worth ratio for this group was 13.7% at the end of the first quarter (NCUA 5300 data), but this capital cushion won't last forever."

• Q1 2011 detailed data shows 173 billion-dollar-plus CUs (2.3% of all CUs) holding 47% of industry assets, up a full percentage point from last year. On the opposite end of the asset spectrum, NCUA data shows 5,195 CUs-70% of all CUs) with assets less than $50 million, holding just 7% of industry assets.

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