NCUA released a largely stellar report on the financial health of credit unions citing, among other things, robust increases in total loan volumes, assets and membership, while noting that many institutions have reduced their stakes in long-term investments.
In addition, total loans at federally insured credit unions reached $769.5 billion at the end of the third quarter of 2015, a 10.7% surge from the same period last year. Loans climbed across all asset sizes and in every major category.
Membership at FISCUs soared to more than 102 million at the end of the third quarter, an increase of 3.4 million from the end of the third quarter of 2014.
The number of FISCUs continued to decrease, hitting 6,090 at the end of the third quarter, 260 less than at the end of the third quarter of 2014, a 4.1% decline.
Jay Johnson, EVP and partner at Callahan & Associates Inc., a Washington-based consulting and research firm, said that the NCUA report underlines the strong ongoing financial health of the industry.
"We look at all credit unions – not just federally insured ones – and we are seeing robust numbers across the board and we are on pace for a record-setting year," Johnson said. For example, he said CUs are loaning almost $1 billion per day—with about $310-billion in loans handed out to members year to date.
Curt Long, chief economist and director of research at NAFCU concurred, suggesting a "strong growth phase" for the industry as a whole.
"Loan growth is outpacing share growth, but share growth remains strong, particularly with respect to core deposit accounts and share draft accounts," Johnson noted. "We are also witnessing credit unions taking bigger market shares in first mortgage loans and auto loans."
NCUA Chief Economist Ralph Monaco pointed out it's not just individual personal loans that are climbing, but member business lending, as well. Indeed, Johnson agreed, noting the average member combined loan and share balance is now more than $16,000—an all-time high.
Steven Houle, VP-advisory services at Catalyst Strategic Solutions, a wholly-owned subsidiary of the $3-billion Catalyst Corporate FCU of Plano, Texas, said loan growth is definitely an important gauge of the overall financial health of industry, but other factors must also be considered.
"At a minimum, loan growth tells us that members are actively seeking credit to purchase vehicles, homes or other personal items and credit unions are willing to make the loan at the prevailing rate," Houle said. "But what's more important is looking at the profitability of the loan portfolio and the balance sheet profile."
Houle said the industry has seen positive loan growth for the last five years and its net margin has slightly increased from 2.89% in 2011 to almost 3% this year. "So even though we've seen the cumulative loan yield decline from 5.76% to 4.64%, cost of funds and provision expense has declined more on a relative basis," he added.
In addition, Johnson said delinquencies are at their lowest levels since 2008, while net charge-offs are at their lowest since 2006, putting CUs in a strong position.
The NCUA report noted that delinquency rates at federally insured CUs edged up slightly in the third quarter, but experts said the rise is not enough to worry about.
"Delinquency rates at credit unions have always been lower than at banks, but the fact that even these figures have declined so much since the Great Recession indicates not only a strengthening economy, but the continuation of high underwriting standards at credit unions," Long said.
The only dark cloud Johnson sees is that as the industry consolidates, the number of smaller CUs continues to decline. "There are, of course, many smaller credit unions that are doing very well, but I think the industry as a whole needs to do a better job of ensuring that smaller institutions survive."
Houle noted the pace of CU mergers, while still strong, appears to have recently slowed down. Over the last three years, the industry has averaged more than 270 mergers a year; in 2015 there have been 183 so far.
"Regulatory requirements, expense structure increases and competitive pressures are continuing to mount, and the smaller credit unions are definitely more heavily impacted," he explained. "We anticipate the merger trend to continue, though as lending growth is beginning to reach all but the smallest of credit unions, driving up net worth and earnings, the number of mergers per year should continue to slow."
Looking ahead, Johnson said Q3 results underscore CUs' momentum. "With the economic environment continuing to gain traction, I would expect more opportunities for credit unions to deepen their member relationships," he added. "Loan and share growth should remain strong with liquidity management becoming more of a focus."
NAFCU's Long said credit unions are in "good shape" heading into 2016. "Improvements in the labor market have driven loan demand, and that should continue next year," he predicted. "There are some challenges on the horizon, not the least of which is, most likely, the advent of the Fed's rate normalization efforts. Regulatory burden is another ongoing headwind. But the industry appears to be well-positioned to weather these storms."
With respect to the Fed's rate activities, Houle said the overwhelming majority of economists—as well as the Fed's own statements—project a slow pace for rate increases, anticipating the Fed Funds will reach 1.20% by year-end 2016 and remain inside of 3% throughout 2017.
"This gradual increase bodes well for credit union balance sheet managers, enabling them to take advantage of increased loan and investment yields while hopefully tempering the impact on their cost of funds," he said. "Credit union management and examiners have been focused on rising rate exposure for years now, and the vast majority have repositioned their balance sheets to be able to sustain a drastic, fast rate increase."
Also, according to Houle, investments with maturities over five years comprise only about 9% of the aggregate investment portfolio. "Credit unions looking to sell longer-term investments to reduce interest rate risk exposure may already be facing lower market values as the market is already pricing in an increase in rate."
Thus, those looking to sell for liquidity purposes need to compare selling securities to other traditional sources such as borrowings, participating or selling loans, issuing CDs, or growing deposits.
"Looking beyond the investment portfolio, net long-terms assets have trended down to a five-year low of 32.4%, further illustrating credit union are managing their balance sheets effectively to prepare for rising rates," Houle said.
But Brian Turner, president and executive director at Meridian Alliance LLC of Plano, Texas, explained that if CUs are reducing their long-term investments, it is for three reasons.
"First, recent investment yields have been less than 2% for many years," he said. "Now with rates possibly on the rise, many believe that prevailing long-term portfolio yields won't give them an adequate total return profile in contrast to other alternatives. Second, as rates increase, the implied market of the longer-term investment will decline, exposing the portfolio to greater trade losses if sold in the future."
Third, Turner added, should the economy improve enough to permit a slow, steady rise in intermediate-term rates, the returns on short-term alternatives could be comparable to prevailing longer-term holdings.
