By Cynthia Walker, CEO
The credit union industry posted some positive trends during the last quarter. Loan balances grew at a 10.4% annualized pace with July historically being a strong loan growth month due to seasonal factors attributed to car purchases and vacation spending. Credit union delinquency rates fell to .64%, down from .83% one year earlier due to the continued strength in the economy as the labor market approaches full employment. Deposit costs continue to hover at historic lows and yet balances increased 6.7% over the last 12 months. In short, the credit union movement continues to grow, as the first half of 2015 saw credit union savings balances move over 1 trillion dollars. CUNA estimates total credit union membership in the U.S. at 103 million, or 32.5% of the total population.
Interestingly, the credit union funding mix has changed quite dramatically since the recession. Non-maturity deposits represented 56.8% of total deposits at the end of 2008 and are now at 73.3%. This shift may be due to the low dividend rates and the lack of spread between regular share and money market rates versus certificate rates. Members may refrain from locking into a certificate rate in exchange for liquidity or postpone in anticipation that rates are going to rise.
While low deposit costs have helped keep expenses in check, the low-rate environment has proven to be detrimental and caused net interest margins to contract for years as profitability on loans and investments continues to decline. The credit union and banking industries have been eagerly awaiting a rate hike in hopes of improving interest income. Historically credit unions have been able to boost rates on loans and investments faster than on deposits, causing their net interest margin to grow. In addition, many credit unions are currently flush with deposits and could manage competition for deposits (and a shift in funding mix) if they are enjoying greater lending profitability.
The Federal Reserve declined to raise short-term interest rates in its October 2015 meeting. The FOMC has one more meeting scheduled for 2015 on December 15th and 16th. Recent favorable news on the employment front has influenced some forecasters to be more positive on the Fed finally increasing the bank overnight lending rate by 0.25%. As reported in The Wall Street Journal (November 13th) in its nationwide poll of 63 economists, 92% anticipate an increase in the Fed’s benchmark rate at its December meeting.
Notwithstanding the above, the delay in raising rates has caused some to doubt the timing of any rate increase at all. While the door has been kept open for now, some think the door is slowly starting to shut on a rate increase in 2015. There are even some who believe a rate hike will not happen in 2016, given current market outcomes and the upcoming presidential election year. Historically the Fed has avoided tweaking monetary policy in advance of an election. Even if policymakers start to boost rates, the increases could be very modest and spread out over several quarters–perhaps even several years–and any benefit to net interest margins will unlikely be anytime soon.