Credit Unions Bulk Up in Commercial Lending and Home Equity, Along with CDs

Growth at federally insured credit unions continues to come from areas such as business loans, auto lending, credit cards, home equity and payday loan alternatives. Unlike banks, credit unions managed to grow deposits in 2022, adding $50 billion worth of CDs. However, NCUA officials urge caution.

Credit unions went on a lending spree in 2022, bulking up on auto, credit cards, home equity and payday alternative loans. They also fattened their commercial lending portfolios significantly, a frequent point of contention for banks.

The growth among federally insured credit unions, as shown in the National Credit Union Administration’s yearend report, far outshines their banking counterparts.

Commercial loans outstanding at the credit unions surged by 24.5% in 2022 — which is more than double the growth rate reported by banks.

Total loans jumped 20% for credit unions in the same period. By comparison, banks had an 8.7% increase in overall loans and leases outstanding.

Total deposits at credit unions for 2022 nudged up 3.4% from the previous year, the NCUA data showed. But even with this higher deposit cushion, the loan-to-share ratio for credit unions increased a whopping 11 percentage points in 2022, to 81.4%. (Credit unions refer to deposits as “shares.”)

That contrasts with the experience at banks, where total deposits fell by 2.5% over the course of 2022, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile. FDIC Chairman Martin Gruenberg cited a drop in uninsured deposits as the reason. He also said the level of deposits remains above the pre-pandemic average.

The loan-to-deposit ratio for banks hit 62.6% as of yearend, up 6.5 percentage points from 2021, the FDIC data showed. The banks with $1 billion to $10 billion of assets posted the highest loan-to-deposit ratio — 81.01%.

The ratio is an indication of how much capacity a financial institution has to make new loans. The higher the ratio, the less room there is to add more.

NCUA Keeping an Eye on Elevated Risks

NCUA Chairman Todd Harper said that credit unions are “on solid footing” but that the agency is tracking several problematic trends.

“Insured share growth has slowed as consumers have begun drawing down their built-up savings,” Harper said during a press briefing on the yearend report. “Households are also taking on more debt, with the loan-to-share ratio rising more than 10 percentage points” since the fourth quarter of 2021.

With elevated levels of risk — in liquidity, credit, interest rates and cybersecurity — credit union management teams “must be diligent in managing safety and soundness,” Harper added. That’s particularly true against a backdrop of continuing inflation and an uncertain economy, he said.

He cited media reports the NCUA staff had seen about some credit unions offering auto loan interest rates “two or even three percentage points below what other lenders are providing,” said Harper. “That can create long-term interest rate risks for the organization,” he warned, stressing the need for proper pricing on loans and deposits.

In terms of overall performance, credit unions had a return on average assets of 0.89% for 2022, down from 1.07% in 2021. Previous ROAA trends continued to hold, with smaller credit unions posting much lower returns than larger ones.

Credit unions with less than $100 million in assets finished 2022 with an average ROAA of 0.51%. In comparison, credit unions with assets from $100-$500 million had an ROAA of 0.71%; those from $500 million-$1 billion, 0.81%; and greater than $1 billion, 0.95%.

Read more: NCUA Chief’s Top Worries: Deposit Pressure, Loan Pricing and Fintech Partnerships

Auto Lending and Credit Card Trends Are Concerning

The NCUA reported an overall delinquency rate at federally insured credit unions of 0.61% for the fourth quarter of 2022, an increase of 12 basis points from yearend 2021.

Two areas of credit concern were flagged. One is auto lending, where the overall delinquency rate rose 25 basis points in 2022, to 0.67%. The other is credit card lending, which had a 1.48% delinquency rate at yearend versus 0.96% in 2021.

“In absolute terms those numbers are still somewhat modest,” said Harper, “but the growth rates are somewhat concerning.”

By contrast, the delinquency rate on commercial loans actually fell, ending the year at 0.33%, versus 0.44% at the end of 2021.

Andrew Leventis, chief economist at the NCUA, pointed out that the credit union industry has been growing second liens on homes at a rapid pace. (This can include home equity loans and home equity lines of credit, where a main mortgage is in place.)

At yearend, second liens (also called “junior” liens) totaled $105.3 billion, up 39.3% from yearend 2021. “This is the most striking feature of the last couple of data summaries,” Leventis said. “This is consistent with what’s going on in the overall market, although I think credit unions’ market share is probably growing a little bit in the space.”

Another interesting trend is the industry’s increase in payday alternative loans. This reflects the agency’s multiple steps to create new options for credit unions to offer small-dollar loans, which has been a goal for financial regulators for some time. At yearend, outstanding payday alternative loans extended by federally insured credit unions had risen nearly 35% over the year before, to $226.6 million outstanding.

Auto loans outstanding were up 20% for 2022 and the borrowing outstanding on credit cards rose 15.6%. In terms of total outstandings, home-related loans comprise the largest portion of credit union loans, followed in descending order by auto, commercial and credit card lending.

Read More:

Certificates of Deposit Growing Gangbusters

Leventis reiterated that the loan-to-share ratio of 81.4% at yearend 2022 was up more than 10 percentage points from the year earlier, when it had stood at 70.2%. (In fact, the NCUA report indicates that at the end of the first quarter of 2022, the loan-to-share ratio was only 70.3%.)

“That’s quite a large increase,” said Leventis. He said that credit unions had gotten flush with deposits during the pandemic, but that they were now making more credit available to members, prompting the hike in the lending ratio.

Also worth noting: Share certificate accounts, the credit union equivalent of certificates of deposit, rose by $49.2 billion in 2022. That’s an increase of almost 20% year over year.

Read More: Deposit Competition Is On, But Should CDs Still Be the Go-To?

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