Matz: Industry Trends Good News, But Interest Rate Risks Lie Ahead
ALEXANDRIA, Va. (Dec. 2, 2013) – America’s 6,620 federally insured credit unions continued positive trends in most metrics during the third quarter of 2013, including loans, membership and net worth, according to new data released today by the National Credit Union Administration.
“Federally insured credit unions are on the right course,” NCUA Board Chairman Debbie Matz said. “The good news is we continue to see strong, positive trends in the industry. Credit unions are serving their members and investing in their communities by making the loans needed to purchase homes, buy cars and go to college. That said, smaller credit unions still face challenges in growing loan volume, generating earnings and attracting members, so NCUA must continue to provide them with needed assistance, training and support.”
Matz also cautioned that interest rate risk, particularly in rate-sensitive deposits, fixed-rate mortgages and certain investments, is something credit unions should take very seriously.
“As interest rates go up, credit unions could be caught between a rock and a hard place,” Matz said. “They have been paring expenses and reducing loan loss reserves to maintain earnings. However, as they make new loans at lower interest rates than older loans coming off their books, they have been making longer-term investments to increase yield. If credit unions haven’t planned carefully, the value of those investments could decline when rates rise.”
NCUA released the new industry figures based on Call Report data submitted to and compiled by the agency for the quarter ending Sept. 30, 2013.
Loan Growth Continues for 10th Consecutive Quarter
The loan growth trend that began in 2011 continues. Total loans in the industry rose 2.9 percent to $631.5 billion in the third quarter of 2013, a faster pace than in the previous quarter. Lending by federally insured credit unions continued to rise in nearly every category, including:
- New auto loans grew to $69.0 billion, up 4.0 percent from the second quarter and up 11.4 percent since the end of the third quarter of 2012.
- Used auto loans increased to nearly $125 billion, up 3.1 percent from the previous quarter and up 9.7 percent since the end of the third quarter of 2012.
- First mortgage loans reached $262.3 billion, up 3.3 percent from the second quarter and up 7.7 percent since the end of the third quarter of 2012. Notably, 62.4 percent of first mortgage real estate loans are at fixed rates.
- Net member business loan balances grew to more than $44.6 billion, up 2.5 percent from the second quarter and up 9.3 percent since the end of the third quarter of 2012.
- Non-federally guaranteed student loans grew to $2.5 billion, up 10.2 percent from the second quarter and 32 percent since the end of the third quarter of 2012.
The growth in loans contributed to a rise in the industry’s loans-to-shares ratio, which is now 69.7 percent, the highest level since year-end 2010.
Credit Unions Making Longer-Term Investments
Credit unions’ investments fell slightly as a share of assets in the third quarter, but the portion of those investments going into longer-term instruments has grown since the third quarter of 2012. In a rising interest rate environment, longer-term investments could pose risks for credit unions.
The share of assets in investments with maturities of three years or more increased to 11.9 percent in the third quarter of 2013 compared to 9.4 percent in the third quarter of 2012. The share of assets in investments with maturities 5 years or longer increased to 4.4 percent in the third quarter of 2013 compared to 3.1 percent in the third quarter of 2012.
Credit Union Membership Rises by 726,911 as Industry Consolidation Continues
Membership in federally insured credit unions continued to grow strongly, reaching 95.9 million, a new record, in the third quarter of 2013. Membership grew by 726,911, or 0.8 percent. Credit unions have added more than 2 million members in the last four quarters.
The number of federally insured credit unions fell to 6,620, or 61 fewer than at the end of the second quarter. The drop is consistent with recent trends and includes 58 voluntary mergers and one bank conversion.
Return on Average Assets Declines and Quarterly Earnings Slow
The credit union industry’s return on average assets ratio stood at an annualized 80 basis points at the end of the third quarter. The ratio is down slightly compared to recent a year earlier when it was 86 basis points. Much of the year-over-year decline is due to continued downward pressure on net interest margins created by the current interest rate environment.
Net income at federally insured credit unions increased $1.8 billion in the third quarter, a drop from the $2.2 billion increase recorded in the second quarter and the $2.1 billion increase recorded in the third quarter of 2012.
Net Worth Ratio Climbs as Industry Stays Well-Capitalized
The industry’s net worth ratio was 10.65 percent at the end of the third quarter, up 15 basis points from the end of the second quarter. The ratio is at its highest level since the end of 2008.
The industry remains well-capitalized, with 96.6 percent of all federally insured credit unions reporting a net worth at or above the statutorily required 7.0 percent. The figure is slightly higher than the prior quarter.
Assets Rise Again While Shares Drop Slightly for the Quarter
Federally insured credit unions’ total assets grew by $558 million in the third quarter to $1.06 trillion. Overall, share and deposit accounts at credit unions declined during the quarter by $3.6 billion to $905.9 billion, in contrast to increases in recent quarters. Rate-sensitive money market shares showed a slight rise. The decline in shares resulted in part from the conversion of a credit union to a bank.
Delinquency and Charge-Off Ratios Remain Steady
Delinquency and net charge-off ratios for federally insured credit unions both dipped slightly in the third quarter. The delinquency ratio fell to 1.02 percent from 1.04 percent a quarter earlier. The industry’s net charge-off ratio declined one basis point during the quarter to an annualized 57 basis points. The percentage of loan charge-offs due to bankruptcy also fell slightly, to 20.5 percent from the second quarter’s 20.7 percent.
Larger Credit Unions Outperform Industry Again
Federally insured credit unions with more than $500 million in assets continued to lead the industry in most performance measures. With $708 billion in total assets, these 422 credit unions held 67 percent of industry total assets during the quarter. They also reported a higher return on average assets than the industry as a whole. Smaller credit unions once again recorded higher net worth ratios, but lagged in net worth growth, loan growth, membership gains and return on average assets.
A summary of credit unions’ current ratios and growth from the third quarter of 2012 to the third quarter of 2013 by asset size for selected metrics follows:
|Net Worth Ratio
|Return on Average Assets
||95 basis points
||60 basis points
||34 basis points
||- 3 basis points|
For more information about the performance of federally insured credit unions, NCUA makes the complete details of the September 2013 Call Report available online here. A summary for the industry’s third quarter’s performance is available here, and financial trends data for federally insured credit unions are available here.
NCUA is the independent federal agency created by
the U.S. Congress to regulate, charter and supervise
federal credit unions. With the backing of the full
faith and credit of the United States, NCUA operates
and manages the National Credit Union Share
Insurance Fund, insuring the deposits of more than 101
million account holders in all federal credit
unions and the overwhelming majority of
state-chartered credit unions. At
Pocket Cents, NCUA also educates the public on consumer protection and financial literacy issues.