After Several Strong Years, How Long Can CUs' Hot Streak Last?

2016 was a good year for credit unions, continuing a run that has lasted for several consecutive years. But just how long can the industry's hot streak last?

According to data from the National Credit Union Administration (NCUA), total loans outstanding at federally insured credit unions reached $847.1 billion at the end of the third quarter of 2016, a 10.1% jump from one year earlier. On a year-over-year basis, loans climbed in every major category, including a 15.8% lift for new auto loans, a 14% rise in net member business loan balances, more than 10% growth in new student loans and an 8.2% increase in total real estate lending. Credit union membership also surpassed the 106.2 million-member mark during Q3, equating to approximately one-third of the entire U.S. population.

Still, larger-asset credit unions continue to post the biggest gains in loans and membership, outpacing their smaller peers. Indeed, some smaller institutions (below $100 million in assets) actually lost membership, reflective of the struggles small CUs face and the continued consolidation across the industry.

Dark Clouds Ahead?

So what does 2017 hold for credit unions?

In spite of this year's solid results, the normally sanguine NCUA Chairman Rick Metsger warned of some headwinds ahead. "Credit unions must guard against risks on the horizon like rising interest rates and regional economic downturns, particularly in [the] energy-producing states," he cautioned.

The emergence of another wild card, namely President-elect Donald Trump, introduces more confusion and worries about the economy next year – although it must be noted that the billionaire's improbable victory in November has since pushed U.S. stocks to record highs.

Ironically, growth has been so strong for credit unions over the past few years that it makes it harder and harder to keep up such powerful momentum from an ever-elevating base and expanding expectations.

"Our biggest challenges for loan growth over the next year will be whether we can sustain the origination volumes we have seen over the past [two to three] years as rates start to rise and competition for loan volume from both traditional and non-traditional lenders increases," suggested Bob Stroup, consumer loan product strategy director at the $15.7 billion Boeing Employees Credit Union (BECU) of Tukwila, Wash.

Kam Wong, president and CEO of the $2.4 billion Municipal Credit Union of New York City, noted that while he anticipates continued growth in Municipal's membership and loan portfolios in 2017, the recent Fed rate hike may limit loan growth, particularly compared to 2016. But higher interest rates could also help credit union membership.

"The macro-economic changes predicted in 2017 will undoubtedly bring new members through our doors due to the fact that big banks will likely make more immediate and broader adjustments to the rate change, which could 'price out' many individuals from banking with them," he explained.

Wong predicted that the greatest challenge for credit unions as a whole next year will be facing the "challenge of change."

"We must be cognizant of the fact that we will not only experience a change in rates next year…but also a change in the regulatory environment that we have learned to work with since Dodd-Frank became law," he explained. "Many of our operational procedures have been designed to fit within a certain set of rules and regulations that we have been governed by, and large-scale changes to these rules and regulations may affect membership and loan growth in the short-term, despite the long-term positive outlook our industry has [with respect] to proposed regulatory reform."

In additional, market and consumer conditions may become more volatile in 2017, Wong warned, which could lead to lower levels of consumer spending and the need for credit union members to have access to financing or credit.

Homes, Cars and Deposits

For the industry as a whole, Curt Long, chief economist at the National Association of Federal Credit Unions, expects membership and loan growth to remain strong. "As interest rates rise, more people will look into credit union membership in order to take advantage of their superior rates," he said. "Loan growth will depend largely on economic and financial conditions – we may see slowing in some important areas as the auto market looks to have plateaued and refinances will likely taper in 2017 if mortgage rates continue to rise."

Perc Pineda, senior economist at the Credit Union National Association, believes loan growth and membership growth at credit unions will remain positive in 2017, as household balance sheets continue to improve and the housing market stays in "recovery mode." In particular, Pineda said that auto lending at credit unions will continue to grow, but at a weaker pace than in recent years.

"Lower auto sales [are] expected in 2017 compared to 2016 and 2015," he indicated. "Membership next year could be slightly lower as the auto lending boom begins to slow and indirect borrower memberships decline."

Gradual interest rate increases will also likely play a part in the number of mortgages CUs are able to originate in the coming year, added Pineda, who pointed out that the 30-year fixed mortgage rate rose by 50 basis points between the end of October and November.

"Mortgage rates will most likely remain low by historical standards and not drastically increase in a short amount of time," he said. "As mortgage rates increase, it will negatively impact credit union refinance business. Fixed and adjustable mortgage lending will continue strong in 2017, given stable housing demand and the current home-ownership rate which has plenty of room to increase."

And with Federal Reserve short-term interest rates on the rise, expect consumers to be looking for higher returns on deposits. "We expect the anticipated transfer of funds to money market mutual funds will finally materialize," he said. "With inflation in the offing and the windfall from lower oil prices disappearing, cautiously optimistic members will seek higher returns."