Macro-Economic And Industry Trends (1Q19)

What credit unions need to know about members, lending, asset quality, share balances, and more at first quarter 2019.

Credit unions delivered exceptional value to members in first quarter 2019 across a host of metrics. Read on to learn the full story.

Macro Economic Trends

Economy Grows; Fed Holds Rate Steady

  • At 3.1%, annual growth in real GDP increased 0.9% above the prior quarter.
  • After increasing interest rates four times in 2018, the Federal Reserve has indicated it will not increase rates in 2019 and economists are now expecting a rate cut.
  • At 1.6%, inflation falls short of the long-term target of 2.0% despite a strong labor market.

The U.S. economy has seen 20 consecutive quarters of economic expansion as real GDP increased at an annual rate of 3.1% as of March 2019. This is the second largest expansionary decade in the United States since 1900. Stock market troubles and slower GDP growth (2.2%) at the end of 2018 set the market up for recovery in the first three months of 2019. After raising rates four times in 2018, The Federal Reserve is expecting to hold rates steady through 2019, with some talks of potential rate cuts in the future.

The increase in real GDP in the first quarter of 2019 was driven by personal consumption. At $13.1 trillion, personal consumption accounts for 69.1% of total GDP. Over the past 12 months, personal consumption has increased $347.2 billion, or 1.2%, and accounts for 52.2% of the annual real GDP growth. Expenditure on goods contracted for the first time since March 2018, down 0.7% year-over-year. Expenditure on services, on the other hand, increased 2.0% annually and has consecutively posted a positive rate since the first quarter of 2013.

Inflation

Core personal consumption expenditures (core PCE) increased 1.6% annually, slightly below the target inflation level of 2.0%. The Federal Reserve’s preferred measure of inflation, core PCE excludes the more volatile sectors of food and energy to more accurately express the value of the dollar. Over the past three quarters, annual change in core PCE fell incrementally, down from 2.0% in in the third quarter of 2018, to 1.6% in the first quarter of this year.

PERSONAL CONSUMPTION EXPENDITURE EXCL. FOOD & ENERGY

DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

Source: BEA.Gov

Employment

There are two ways to look at employment: the labor force participation rate and the traditional unemployment rate. The labor force participation rate measures the ratio of Americans available for work as a percentage of the total population while the unemployment rate is the ratio of Americans without a job who are counted in the labor force as a percentage of the total labor force. The combination of a decline in number of unemployed and labor force expansion contributed to the drop in the unemployment rate. The national unemployment rate dropped from 3.9% at year-end 2018 to 3.6% as of first quarter 2019, the lowest rate since September of 1969. As the unemployment rate falls, so has the labor force participation rate. As population growth outpaces labor force growth, the participation rate lowered from 63.2% in February 2019 to 63.0% in March 2019.

According to the Federal Reserve Bank of Atlanta, wages increased 3.5% nationwide in the first quarter of 2019. Lower-wage workers had the highest relative gains after 21 states and the District of Columbia increased minimum wages. As wage growth (3.5%) outpaces inflation (1.6%), the average employed American is enjoying more purchasing power.

Interest Rates

Adjustments to the federal funds rate is one of the most common monetary policy tools. After four increases to the benchmark interest rate in 2018, The Federal Reserve maintained its target range for the federal funds rate at 2.25%-2.50% in the first quarter of 2019. As the trade war between the United States and China escalates, there is a 55.1% probability of a cut to the federal funds rate, according to Bloomberg. “A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown,” said James Bullard, president and CEO of the Federal Reserve Bank of St. Louis.

PROBABILITY OF FED RATE CUT AT JULY 2019 FOMC MEETING

DATA AS OF 06.03.19
© Callahan & Associates | CreditUnions.com

As the trade war between the United States and China escalates, there is a 55.1% probability of a cut to the federal funds rate, according to Bloomberg. Some experts suggest that a downward policy rate adjustment may soon be warranted.

Source: Bloomberg

10 YEAR TREASURY YIELDS

DATA AS OF 05.21.19
© Callahan & Associates | CreditUnions.com

One way to measure the health of the U.S. economy is to compare the difference between shorter and longer-term interest rates on the yield curve. An inverted yield curve has preceded every recession since 1975.

Source: Ryan ALM

“One way to gauge the health of the U.S. economy is to compare the difference between shorter and longer-term interest rates on the yield curve,” adds Sam Taft, assistant vice president of analytics and business development at Callahan & Associates. There are two different measures of the yield curve that can be insightful. The first is the difference between the yield on the 3-month Treasury bill and the yield on the 10-year Treasury note and the second is the gap between the 10-year and 2-year notes.

An inverted yield curve is when the shorter-term yield exceeds the 10-year yield, which has preceded every recession since 1975. On March 22, 2019, the 10-year Treasury note premium over the 3-month yield dipped into negative territory as the 10-year yield (2.44%) fell below the 3-month yield (2.46%) for the first time since July 2007. Since March 22, the 3-month yield has periodically exceeded the 10-year yield, creating this inversion throughout 2019, a possible indicator of an economic recession in the foreseeable future.

Some economists prefer to use the gap between the 10-year and 2-year, as the 2-year yield reflects expectations for Fed policy for a period beyond the next meeting or two. Although it is flattening, the 2-year yield has remained below the 10-year so far. In prior pre-recession periods, a “bear inversion” was observed as front-end rates rose well above inflation, making money expensive and resulting in sluggish economic activity. This time around, market spectators are observing a “bull inversion”. With core inflation below the 2% target rate, yields are being pushed down across the curve, with longer maturity bonds dropping more than shorter-term bonds.

Mortgage Market

According to the National Association of Realtors, U.S. existing home sales fell 4.9% from February to March 2019, the largest monthly decline since November 2015; this trend continued into April as sales fell 0.4% from March to April. Despite advancing 3.8% from February to March 2019, the NAR Pending Home Sales Index, which measures the number of contract signings, declined 1.5% in April, marking the 16th consecutive month of annual decreases. According to Lawrence Yun, NAR chief economist, although “the latest monthly figure shows a mild decline in contract signings, mortgage applications and consumer confidence have been steadily rising. It’s inevitable for sales to turn higher in a few months.”

After steadily rising, the average rates for the 30-year and 15-year fixed-rate mortgages dropped from a year prior as of first quarter 2019 as the Fed signaled it would be patient on rates. The average rate for a 30-year fixed-rate mortgage was 4.27%, down 17 basis points year-over year, while the average rate for the 15-year fixed-rate mortgage dropped 19 basis points over the same period to 3.72%. While rates on fixed-rate mortgages fell, the average rate on a 5-year adjustable rate mortgage climbed 18 basis points to 3.83%.

NATIONAL MORTGAGE RATES

DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

Source: Bloomberg

Household Debt

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Total household debt rose for the 19th consecutive quarter, reaching an all-time high of $13.7 trillion as of March 31, 2019. At $9.2 trillion, mortgage balances increased $120 billion from year-end 2018 to March 31, 2019. Moving in an opposite direction, home equity lines of credit, contracted $6 billion to $406 billion over the same period. “Household debt continues to increase nationwide, reaching pre-recession levels,” says Alix Patterson, Callahan’s chief experience officer. “The economy is strong, but consumers and institutions alike must continue to monitor debt levels for indications of financial stress.”

Following a more volatile end to 2018, the first quarter of 2019 has picked up some momentum. Increasing wages, low unemployment, and strong consumer confidence continue the push for the longest U.S. expansionary period. “While the economy is growing, the inverted yield curve and low inflation point to a more cautious economic outlook,” Patterson says. “It will be imperative to monitor how the Fed conducts monetary policy through the remainder of 2019.”

Credit Union Trends

Industry At-A-Glance

Top-Level Takeaways

  • Credit union membership grew 4.0% in the first quarter of 2019, pushing the total membership number to over 118.6 million.
  • Share growth accelerated 65 basis points quarter-over-quarter to 6.3% in the first quarter of 2019. Total deposits stand at just under $1.3 trillion.
  • Asset quality improved year-over-year as delinquency and net charge-offs fell 8 and 3 basis points, respectively.

Credit unions have a business model distinct from other financial institutions — one in which members are owners, and their financial wellness is the credit union’s top priority. At the start of 2019, one clear priority for credit unions was enhancing the entire member experience — from opening a checking account, to applying for a first mortgage, and everything in between.

While rates are important, it’s not the only part of the credit union experience that matters. It’s more important than ever for credit unions to invest in technology, products, and services for their members and employees. The rise of fintechs and other competition put pressure on credit unions to enhance members’ digital experience in conjunction with physical, in-branch level transactions. “We’re seeing credit unions investing time and energy into creating experiences beyond rates to attract new members,” says Alix Patterson, chief experience officer at Callahan & Associates.

Industry Performance

The number of credit unions in the country declined from 5,646 in the first quarter of 2018 to 5,451 in the first quarter of 2019. As of March 2019, there were 3,350 federally chartered credit unions and 2,101 state-chartered credit unions. The year-over-year decline of 195 credit unions is consistent with long-running consolidation trends.

Despite industry-wide consolidation, credit union performance metrics continue to improve year after year. Total assets increased 6.3% year-over-year to over $1.5 trillion in the first quarter of 2019. Loan balances increased $77.6 billion over the first quarter of last year. Loan growth slowed 1.8 percentage points, from 9.7% in the first quarter of 2018 to 7.9% in the same three months this year. On the other side of the balance sheet, share growth accelerated in the first quarter, up $70.1 billion annually to $1.3 trillion, a 5.8% increase year-over-year.

Investments and cash grew 1.4% over the past year, a change from negative growth the past six quarters, totaling $395.1 billion as of March 2019. Capital growth also accelerated 2.8 percentage points to 9.7% in the first quarter.

INDUSTRY OVERVIEW

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.2019
© Callahan & Associates | www.creditunions.com
As Of 03/31/19 12-Mo Growth (1Q19) 12-Mo Growth (1Q18)
Assets $1,523.9B 6.3% 5.8%
Loans $1,060.1B 7.9% 9.7%
Shares $1,288.3B 5.8% 5.6%
Investments $395.1B 1.4% -3.2%
Capital $175.2B 9.7% 6.9%
Members 118.6M 4.0% 4.3%

Share growth accelerated 13 basis points in the first quarter of 2019, compared to 2018.

Members

Credit unions added 4.6 million members over the year, including 1.1 million in the first quarter of 2019. Annual membership growth decreased 27 basis points year-over-year to 4.0% as of March 2019. In fact, first quarter growth has stayed above 4% for the last three years as more people adopt the industry’s member-focused, not-for-profit financial model.

MEMBERSHIP AND ANNUAL GROWTH

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

Credit union membership is up 4.6 million members year-over-year, a 20.5% increase over the past five years.

Employees

Credit unions are also investing in their workforce. Full-time employment is increasing at a faster rate than last year, a 37 basis point increase to 4.6% as of March 2019. Comparatively, part-time employment decreased 9.9% year-over-year. Credit unions currently employ 294,000 full-time employees and 25,000 part-time employees. More workers are entering as full-time employees as opposed to part time as credit unions are offering more competitive wages and benefits. The average salary and benefits per full-time equivalent employee was $79,001 as of March 2019 — a $2,625 increase from March 2018.

FULL-TIME AND PART-TIME EMPLOYEES AND ANNUAL FTE GROWTH

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

Full-time equivalent employee growth of 3.9% kept pace with accelerating membership growth.

Market Share And Member Impact

Credit union market share remains strong in three major loan products — auto, mortgages, and credit cards. In 2019 credit unions have a much larger share of the market in these three areas than they did five years ago.

Credit union auto market share has improved 3.6 percentage points since March 2014. Today, a credit union finances 18.6% of auto loans nationally. First mortgage market share has also grown — it’s up 1.6 percentage points in the past five years to 8.0%. Credit card market share has increased at the slowest rate among the three products — 90 basis points in the past five years to 6.1%.

Credit unions are not only recruiting new members to the movement, they are also enticing members to use more products. A growing membership base runs the risk of diluting penetration metrics; however, that is not currently the case with U.S. credit unions. Credit unions have reported improvements from five years ago in credit card, share draft, and auto penetration. “Although credit unions are doing well at getting members to use them for core checking accounts, we are seeing the credit union value proposition resonate across all segments of the product portfolio – not just checking,” says Patterson.

Total share draft penetration was 58.1% in the first quarter of 2019, the highest percentage yet and up 82 basis points from this time last year. Auto loan penetration increased 60 basis points over the year, to 21.2%. Credit card penetration is at 17.5% for the first quarter of 2019, and real estate penetration held steady at 4.4%.

PENETRATION RATES

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

Penetration rates increased for almost all products in the past five years.

The average member relationship topped $19,000 for the first time in 5 years, to $19,156 after a $3,175 increase from the first quarter of 2014. Over the past year, loan balances per member were up 5.0% to $8,400, while the average share balance per member, at $10,756, grew at a more tempered pace of 1.6%.

AVERAGE MEMBER RELATIONSHIP

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

The average member relationship topped $19,000 for the first time, fueled by a $3,175 increase from this time last year.

Balance Sheet: Assets

  • Loan originations contracted for the first time since September 2014.
  • At 0.58%, the delinquency rate is at its lowest level since 2007.
  • Investments grew 1.4% year-over-year, rising $5.5 billion to $395.1 billion in the first quarter.

The aggregate loan balance at credit unions nationwide was just under $1.1 trillion in the first quarter of 2019. The 7.9% annual growth in balances, however, was 1.2 percentage points slower than in the fourth quarter of 2018 and 1.8 percentage points slower than in the first quarter of 2018.

Loan Originations

Total loan originations contracted year-over-year for the first time since 2014. In the first quarter of 2019, originations fell 5.5% annually to $111.4 billion year-todate. Consumer loan originations fell 2.4%, or $1.9 billion, from one year ago to $76.8 billion through the first three months of 2018. They accounted for 68.9% of total loan originations year-to-date.

YTD LOAN ORIGINATIONS AND ANNUAL GROWTH

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

Year-to-date originations contracted 5.5% in the first quarter of 2019, the first decrease in originations since 2014.

In the first three months of the year credit unions originated $26.0 billion in mortgages. Fixed-rate products make up the lion’s share of mortgage originations, at 63.3% of the total portfolio. Fixed-rate originations totaled $16.4 billion as of March 2019, balloon mortgages were $6.4 million at 24.8% of the portfolio, leaving the remaining 11.9%, or $3.1 billion, to adjustable rate originations. There has been a shift since 2017 as the composition of total mortgage originations have moved to favor adjustable products, considering the rate environment in 2018.

YTD MORTGAGE ORIGINATIONS BY TYPE

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

Credit unions are favoring adjustable rate mortgages over fixed-rate mortgages.

Loan Balances

Despite slowing loan growth, total loan balances increased $77.6 billion year-over-year.

TOTAL LOANS AND ANNUAL GROWTH

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19/h5>
© Callahan & Associates | CreditUnions.com

Loan growth slowed in the first quarter of 2019, to 7.9%.

Real estate loans have historically made up majority of the loan portfolio. However, this concentration has fallen 3.0 percentage points in the past five years to 49.6% of total loans in 2019. First mortgage loans outstanding totaled $435.7 billion in the first quarter of 2019, with other real estate loans at $89.8 billion. First mortgages and other real estate loans grew 7.9% and 8.1%, respectively.

Auto loans increased their share of the loan portfolio in that same period, from 31.1% of the portfolio in the first quarter of 2014 to 34.9% in the first quarter of 2019. At the same time, new auto loans grew 98.7% and used auto loans grew 69.5%. “The combination of rising new car prices and the record number of used vehicles on the market, and entering the market off-lease, has contributed to much more competitive pricing dynamics in recent years,” says Sam Taft, Callahan’s assistant vice president of analytics and business development. “With the growth of auto loans over the past five years we have seen a pronounced shift in the makeup of the average credit union portfolio since 2014.”

TOTAL LOANS OUTSTANDING

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

While real estate loans have lost 3.0 percentage points of loan share over the past five years, auto loans have picked up 3.8 percentage points of the loan portfolio.

Total auto loans increased $26.7 billion, or 7.8%, annually to reach $370.3 billion as of first quarter 2019. With annual growth of 8.5%, new auto loans increased $11.6 billion. Used auto loans increased 7.3% to reach $222.9 billion. Indirect loans continued to play a significant role in the auto loan portfolio. These loans expanded 11.2% year-over-year to close the quarter at $225.4 billion. They comprised 60.9% of total auto loans in the first quarter, up from 59.0% one year ago.

Credit card balances rose $4.4 billion, or 7.7%, annually to $61.6 billion. Other real estate loans increased 8.1% during the same period and reached $89.8 billion. Other real estate loans was the only major lending category to grow faster this year than last.

LOAN GROWTH BY PRODUCT

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

Loan growth slowed across all major loan products except other real estate loans.

Asset Quality

Delinquency at U.S. credit unions was 0.58% in the first quarter of 2019, an 8 basis point improvement over the year, and the lowest level it has been since 2007. First mortgage loans had the lowest delinquency of any loan type, at 0.39%, a 3 basis point improvement from the year prior. This is also the lowest level first mortgage delinquency has been since June 2007. Auto loans also had a nearhistorically low delinquency rate in the first quarter of 2019 at 0.53%, a 2 basis point improvement year-over-year.

Credit unions should continue to monitor credit card delinquency, the only loan product to increase delinquency rates over the year. At 1.26%, credit card loans have the highest delinquency rate of any loan product.

DELINQUENCY BY TYPE

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

At 58 basis points, total credit union delinquency is at the lowest level it has been since the first quarter of 2007.

Although the total net charge-off ratio has increased over the past five years, it has improved from 2018 levels. In the first quarter of 2019, the net-charge off ratio decreased 3 basis points, from 0.60% in the first three months of 2018 to 0.57% by March 2019. The increase in total net charge-offs from 2015 to 2018 can be attributed to increased credit card charge-offs during that period.

ASSET QUALITY

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.19
© Callahan & Associates | CreditUnions.com

Both delinquency and the net charge-off ratio fell in the first quarter of 2019.

Investments

The investment portfolio at most credit unions can be used to support loan growth. As

May 19, 2022

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