Getting Inside THE NUMBERS

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As 2004 moves forward, credit unions should prepare to see increased volumes in non-real estate lending, while members stopping into make deposits should do so less often.

But new lending business in some product lines, especially auto loans, will mask what is projected to be flat growth in other lines, such as credit cards.

"Credit unions' key challenge in 2004 will be maintaining their return on assets (ROAs)," said Dave Colby, CUNA Mutual's corporate economist, in a new economic analysis. "Stronger economic recovery generally leads to higher interest rates and this will squeeze gross spreads. Additionally, CUs will need to generate more non-spread revenue to makeup for lost interchange income."

Among the findings for 2003:

* Initial estimates show the year finished with 9,729 CUs, a net loss of 312 CUs in 2003.

* Membership was up 909,000 (1.1%) to 84.3 million. "2003 gains reflect a sharp slowdown from previous years, but will likely be revised up when final NCUA 5300 Call Report information is in."

* Assets reached $626 billion, but annual growth was decelerating.

* Loan growth topped 10% with much improved vehicle lending results and record first mortgage originations.

* The loan-to-share ratio hit 72.2% and the capital-to-asset ratio finished 2003 at a healthy 10.8%.

CUNA Mutual Group's analysts noted that with lending up 10%, credit union lending results were the best since 2000. "Our marketplace continues to achieve loan growth above the 10-year average annual rate of increase.

In addition:

Real estate secured loans accounted for 57% of 2003's increase followed by new and used vehicle loans with a 34% contribution. Other consumer loans and agricultural/member business loans (up $1.5 billion, 20%) added another 10%.

* Credit card and other unsecured loans were down for the year.

"With solid momentum carrying over into 2004 we should see total loan growth in the 9%-11% range this year," CUNA Mutual said. "Consumer installment lending (CUCIC), particularly vehicles, will replace some of the 1st mortgage growth contributions. Expect CUs to hold $35-$42 billion more in member loans by the end of 2004."

Installment Lending (CUCIC)

Installment credit gains contributed almost 40% of all CU loan growth in 2003 compared to just 25% in 2002, according to the analysis. The $12.1 billion gain in vehicle loans accounted for 87% of the $14 billion (7.2%) CUCIC increase in 2003.

The analysis suggested that although credit unions trailed the rest of the market in credit card lending, an 8.1% gain in non-card loans helped CUs outgrow the rest of this $2 trillion market by 2.2 percentage points.

"The CU share of this market improved by 20 basis points in 2003 to 10.3%," wrote Colby. "Our current estimates indicate we can expect CUCIC growth in excess of 9% in 2004. This is about a full percentage point above the 10-year average annual rate of increase."

Vehicle Loans

Credit unions generated a remarkable turnaround in vehicle loan portfolio gains during 2003, according to CUNA Mutual. Annual growth improved from 5.2% in 2002 to the current level of 8.9%.

"Growth over the second half of the year was very encouraging, advancing at an annualized rate in excess of 10%," the report said. "The new vehicle loan portfolio was contracting on an annual basis as late as July. Now, year-over-year growth has improved to 4.5%. Our outlook for 2004 indicates vehicle loan portfolio growth in excess of 9%. Positive gains are now much easier to achieve as the erosion from refinance payoffs has dropped significantly."

The analysis suggested that one marketplace factor wishful-thinking credit unions may be hoping will disappear won't do any such thing: manufacturers' incentives. The report pointed to findings by J.D. Power and Associates that 56% of all consumers who purchased a new vehicle in January of 2004 received a cash rebate versus 45% the prior year.

Credit Cards

The credit union credit card portfolio grew $1.1 billion (5.0%) in December due to holiday shopping. Even with this strong finish to the year it was not enough to generate positive full-year growth in 2003.

At $22.2 billion, total credit card loans outstanding at CUs fell 0.1%. Member debt consolidation, economic uncertainty, CU credit card portfolio sales and intense competition from monoline bank issuers have held this segment of CU loans flat for the past three years.

"Growth prospects going forward are weak at best," the company projected. "With the rest of the market advancing 3.7% in 2003, the CU share of this $770 billion market fell to 2.9%."

Real Estate Secured Lending -

1st Mortgages And Other Real Estate

CUs finished the year with record 1st mortgage originations, but overall RE secured loan portfolio growth was constrained by record loan sales and declines in second mortgages.

Real estate-secured loans increased $20.1 billion (13.2%) in 2003 to $172 billion. This portfolio segment is now equal to 44% of all loans and 27.5% of assets.

Fixed-rate, first mortgages were up 15.3% even with portfolio sales estimated to be in excess of $40 billion. When adjustable rate firsts are included, total first mortgage portfolio growth increased to 16.2% in 2003. Home equity growth dipped mid-year, but has recovered to 17.6%.

"Expect reduced 1st mortgage origination volumes in 2004 and escalating activity in home equity lending," states the CUNA Mutual analysis. "Retention levels based on asset gains will dictate final 2004 RE loan portfolio growth results."

Savings and Assets

The combined effects of a seasonal outflow in member savings and deposit yields which continue to fall, produced a $3.1 billion (0.6%) reduction in total CU savings during December. Annual growth finished the year at 8.4%, down from a peak of 12.7% last February.

Deposit growth has slowed sharply from the recession/equity market decline induced results over the previous two years.

In the second half of 2003, the annualized growth rate for deposits was just 1.4%, down from a high of 15.2% in June. Some 143% of the gain since June came from liquid deposit accounts, as CDs were down $2.7 billion (2.2%) over the same period.

"Positive equity market results in 2003, which are carrying over into 2004 and deposit yields under 1.0% for regular shares, less than 1.2% for money market accounts and one year CDs paying under 1.65%, will lead to continued erosion in savings growth this year," the company said. "Total assets finished the year at $626 billion, up 8.9% for the year. While 2003's growth was above the long-term trend rate of increase, CUs will likely slip below this mark in the first half of the year. Credit unions will need to closely manage deposit yields to maintain liquidity flows and gross spreads as interest rates rise."

Capital and Other Key Measures

Annual capital growth has slowed since May, but finished the year up a solid 8.8%. With total assets slipping $2.8 billion in December, the capital-to-asset (C/A) ratio improved to 10.8%.

"Given the 7.0% threshold for safety and soundness, a movement average C/A ratio of 10.8% reflects a healthy industry with more than adequate capitalization," concludes the report.

The $3.8-billion month-only increase in loans combined with a decline in savings produced a 1.1-percentage-point jump in the loan-to-share (L/S) ratio. This key measure finished the year at 72.2%. After bottoming out at 67.5% in May, the L/S ratio is now at its highest level since the beginning of 2002.

Both the C/A and L/S ratios are forecast to climb in 2004, primarily from slower savings growth. The loan delinquency rate fell below 0.7% in December, down over 12% for the year.

Credit Unions and Members

Initial estimates show the credit union marketplace with 9,729 institutions at year-end. This represents a net decline of 312 CUs.

The report suggests that the minimum size to effectively meet members' needs and survive in this increasingly competitive financial services industry continues to rise. Over the past three years, the average annual rate of CU market contraction was just over 3%.

"Final year-end 2003 data will show that the under $20 million asset class experienced the greatest loss of credit unions," the report states. "Our forecast for 2004 calls for the loss of another 304 CUs, barring any major changes in the legislative, regulatory or economic environments. Expect the market size to finish the year around 9,425 CUs."

The company noted that although it forecast slower membership gains over the next few years, preliminary 2003 results are somewhat suspect and subject to revision based on final NCUA 5300 Call Report data. The net gain of 909,000 members over the course of 2003 is a little over half the 1.8 million increase in 2002.

"Normally, results shown in CUNA's Monthly Credit Union Estimates are extremely accurate," said the analysis. "Given the modest sample size used to generate these estimates, they may have had some large CUs purging their membership roles of inactive and low balance members. This would be one explanation for the low results shown for 2003.)

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