The Evolution Of The Credit Union Loan Portfolio

Cooperatives across the nation are enhancing traditional strengths while adapting to new market opportunities.
Andrew Bolton

Over the past 10 years, the credit union industry’s loan portfolio has undergone seismic fluctuations in several key categories. One of the most notable areas of change has been in real estate loans. First mortgages have grown from 31% of the loan portfolio in the second quarter of 2003 to 41.3% as of second quarter 2013, according to Callahan Associates’ Peer-to-Peer analytics. Data on the 5300 Call Report does not separate refinancing from purchase activity; however, according to the Mortgage Bankers Association, refis are driving mortgage growth and accounted for 64% of originations across all lenders in the second quarter.

Real estate growth has come largely at the expense of new auto lending, which decreased from 16.7% of the total portfolio 10 years ago to 10.8% today. Other real estate has held fairly steady, comprising slightly more than 13% of the portfolio then versus 11.6% now. This category peaked at 17% during the real estate boom of 2007 and 2008. During the same era, used auto lending fell to a low of 16.8% of the portfolio but has since rebounded and now accounts for nearly one in five loans.


Source: Callahan Associates’ Peer-to-Peer Analytics

Slightly less than 29% of fixed rate first mortgages in the portfolio today have terms of less than 15 years, slightly more than 33% of fixed rate first mortgages extend beyond 15 years, and the rest of the credit union mortgage portfolio is a mix of products like balloon or hybrid loans and ARMs. Conversely, fixed rate loans with terms less than 15 years constituted more than 33% of the portfolio in 2004, when NCUA started categorizing mortgage loan data on the 5300 Call Report. This concentration fell to slightly more than 21% during the real estate boom as consumers locked in record low interest rates for longer terms. In recent years, mortgages with terms of 15 years and shorter have come back into favor both for consumers who want to pay off their mortgages while rates are low as well as for credit unions who want to manage interest rate risk.

Activity In 2013 And Future Positioning

Over the past year, auto loan balances for both new and used vehicles have rebounded significantly since the recession. Today, new and used loan balances total $70 billion and $122.5 billion, respectively, an improvement over recession-era balances of $80.2 billion and $98.1 billion. Today’s low interest rates are prompting consumers to replace older vehicles with more fuel-efficient models, and forecasts are calling for 15.5 million new vehicle sales through 2013. Credit unions posted an 11.2% annual increase in outstanding new vehicle loans at the end of June despite aggressive incentives from captive finance companies. Although used car sales remain strong, a decrease in supply has caused activity to slow slightly in 2013.


Source: Callahan Associates’ Peer-to-Peer Analytics

In addition to the gains made in traditional areas of lending, credit unions are also diversifying their offerings based on market demands and regulatory guidance. For example, credit unions are providing more credit to small businesses. Credit unions are constrained by a regulation that caps member business loans to 12.25% of assets. However, a 2011 push by NCUA gave more than 1,000 credit unions a low-income designation, which allowed them to exceed the cap and expanded the industry’s capacity to lend. As a result, outstanding business loans have increased 11.1% annually as of June 30; that’s nearly three percentage points faster than the previous June’s growth rate. Additionally, credit unions originated $7.9 billion in business loans through midyear 2013. That’s an increase of almost 17% from the $6.8 billion they originated in the first half of 2012.

With the runaway cost of higher education, credit unions have also been extending more student loans. Call report data on this segment of the portfolio goes back only slightly more than two years, but in that time, outstanding student loan balances have doubled from $1.1 billion in March 2011 to nearly $2.3 billion at midyear 2013. Student loans are likely to continue to grow as an area of opportunity and as a tool to build relationships with a new generation of members.

New product lines offer an exciting opportunity for credit unions that want to break out of the tried-and-true product mold. And as they grow, credit unions will be able to explore more alternative products that meet members’ needs in new ways. However, credit unions cannot lose sight of those relationship-building products that come with large balances, namely mortgages. Today’s low rate environment is unlikely to last much longer, and credit unions need to plan for how they will bring in more purchase mortgages. Refis currently account for 64% of originations, but according to the Mortgage Bankers Association, they’ll make up only 32% of total originations by the end of 2014. These forces, combined with regulatory changes, will play a strong role in shaping the credit union loan portfolio in the next 10 years.

October 7, 2013

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