Two Trends From 2010 To Remain Drivers In 2011

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MADISON, Wis.-Two trends evident in 2010 are likely to continue to be felt by CU managers in 2011, as well.

CUNA Mutual's Credit Union Trends Report noted that during the first 11 months of 2010 "CU leadership did a remarkable job of overcoming economic and assessment obstacles in 2010 to replenish capital through bottom-line growth," although many saw loan portfolio declines and weak asset growth.

"Looking forward, economic and employment growth prospects are improving, but not guaranteed," CUNA Mutual said in its report. "We currently do not see changes in the economic environment which would allow CUs to accelerate asset or loan growth in 2011. Bottom-line gains will rely more on expense management and targeted growth opportunities."

Here's a look at how 2010 will be remembered:

• At $580 billion, total member loans held by CUs are down 1.3% through November 2011, and 1.7% ($10.0 billion) over the one-year period prior. "The primary drivers of this contraction continue to be: CUs choosing not to retain long-term fixed-rate loans with historically low yields (interest rate and duration risk avoidance); members choosing to pay-down higher rate debt (deleveraging) and the overall lack of loan demand due to employment conditions," CUNA Mutual noted.

• Current annual growth results show the strongest loan portfolio gains in MBLs, "other loans," and used vehicle loans, with smaller positives in credit cards and home equity loans. The biggest detractors from annual growth are new vehicle loans and second mortgages.

• Consumer installment credit outstanding at CUs (CUCIC) was down 3.9% through November. "Small gains in used auto, unsecured loans, credit cards and "other" were not sufficient to offset the large drop in new vehicle loans. At $227.6 billion, CUCIC is $9.3 billion below November 2009 and $13.3 billion (5.5%) below its peak in August 2009," CUNA Mutual reported.

• Despite 9.4% contraction in credit cards, the rest of the $2.4-trillion market is outperforming (contracting less) CUs. The primary reason for this stronger performance is renewed vehicle financing through captives, CUNA Mutual said in its analysis.

• CU market share of total CIC has declined almost 0.2 percentage points (pp) over the past year to 9.4%. CUs have increased their share of the $805-billion credit card market by 0.5 pp since November 2009 and it now stands at 4.4%. "Without a significant change in new vehicle financing trends, we expect CUCIC to fall again in 2011."

• The CU total vehicle loan portfolio declined for the 15th consecutive month in November. Vehicle loans represent 29% of all CU loans and are down 5.4% over the past year. Recent trends in new light vehicle sales are significantly more positive than they were a year ago and this is triggering more upbeat forecasts of sales volumes in 2011, according to CUNA Mutual. "We continue to believe new vehicle sales will be generated through subsidized financing by captives, thus CUs are unlikely to finance much of the improved volume. The best we can hope for is a slowdown in the rate of contraction for new vehicle loans."

• The used vehicle loan portfolio segment continues to expand at a modest pace, up 3.6% for the year and 3.7% YTD. Despite continued small growth positives, it is unlikely they are large enough to turn the lending decline around.

• Credit unions continue to originate real estate secured (RE) loans at a brisk pace, but historically low yields and continued erosion in home prices have changed retention strategies, the Trends Report states. Currently, this key lending segment is down 1.4% over the past year. "Looking forward, we see modest declines in home prices through most of 2011 and interest rates creeping up slightly, but not enough to fully price for interest rate and duration risk. Thus we believe CUs will not change retention strategies and will struggle to grow RE loans in 2011," the company said.

Merger Trends

• Beyond lending, looking into 2011, CUNA Mutual reported that at the end of November, 2010, estimates by CUNA Economics and Statistics show 7,631 CUs, a net loss of just 225 since November 2009, which is below average. Given the high level of unknowns, mid-sized and larger CUs likely chose to defer merger strategies which would involve a capital drain. "There was little sense of urgency for smaller CUs as collectively they had very strong capital levels. The 4,003 CUs with assets under $20 million, had a collective net worth ratio of 13.9%. Most of these CUs are in no hurry to merge."

• Given that 2011 will be a similar operating environment to 2009 and 2010, CUNA Mutual said it expects industry consolidation to remain below trend, but added it believes "consolidation will rapidly accelerate in 2012 and 2013."

• CUNA Mutual is projecting that CUs will likely add another million members in 2011, as their economic, operational and regulatory environments will be similar to those experienced in 2010. Going forward, large CUs will dominate membership gains and a significant percentage of small CUs will see a reduction in the number of members, CUNA Mutual said.

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