Muddled Economic Outlook for CUs Continues to Challenge Industry

The economy continues to send out mixed signals when it comes to the environment in which credit unions will be operating for at least the next year. Unfortunately, the conditions seem to be ideally suited to accelerate the bifurcation of the industry between those credit unions large enough to compensate for historically low interest rates with increased lending and those primarily dependent on investment income.

That is the take of this armchair-economist-wannabe of the NCUA’s first quarter summary of the industry’s financial performance. It paints a picture of an improving economy which will nonetheless continue to squeeze the profits of many small to medium sized credit unions.  For example, credit union share deposits rose 23 percent over the last year to $1.69 trillion (incidentally, money market accounts were up 28.5 percent.) Unfortunately, the statistics underscore that loan demand has not increased nearly fast enough to make money off these deposits. The industry’s loan-to-share ratio currently stands at 68.8 percent down from 81.1 percent in the first quarter of 2020. In the aggregate, credit unions are seeking higher yields by putting some of this money into longer term investments. Investments with maturities of 5-10 years rose $54.4 billion to $86.5 billion. Investments with maturities greater than 10 years increased to $9.4 billion.

The bottom-line is many credit unions continue to be caught in a classic vice in which the economy is growing but not fast enough to nudge up interest rates. Furthermore, the consumer is saving more money than ever before and has even dramatically decreased credit card debt over the last year.

In contrast, the number of federally insured credit unions with assets of one billion dollars increased to 388. These intuitions experienced a net worth increase of almost 14 percent. They now hold 72 percent of the industry’s combined assets and experienced robust loan growth at 8.3 percent.  In contrast, net worth for the industry as a whole decreased from 11 to 10 percent. 

Not surprisingly, consolidation is continuing. The number of federally insured credit unions declined to just over 5,000.  There are now 3,167 federal credit unions and 1,901 state chartered credit unions.