CREDIT UNION TRENDS REPORT

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1 CREDIT UNION TRENDS REPORT CUNA Mutual Group Economics July 2 (May 2 data) Highlights First quarter data revisions were modest. The number of credit unions was revised down by and assets and loans were reduced by $2 billion. At the end of May, CUNA estimates show 6,66 CUs in operation. The YTD decline is 5 CUs, significantly faster than the 9 year-to-date average pace reported over the last four years. We have lost 327 CUs since May 2. CU system assets rose 1.1% in May due to five payroll Fridays during the month increasing share draft and regular share accounts 8.6% and 7.6%, respectively. Credit union total assets now exceed $1. trillion, a.6% increase over May 2 Credit union lending is growing at a pace not seen since before the Great Recession. Every loan category, except second mortgages, is reporting positive gains. Big increases in vehicle loans and real estate loans led the way. In total, loans are up 3.3% YTD more than twice the pace set during the first five months of 2, due to an improving economy and rising market share. CU membership reached 99.9 million, with expectations of crossing the 1 million milestone in June. Credit unions attracted members at a record pace during the first five months of 2, averaging over 3, new memberships per month. Credit union capital grew 7.3% over the year ending in May, helping to push the overall capital-to-asset ratio to 1.5%, from 1.2% in May 2. Credit union loan delinquency rates fell to.81% in May, down from 1% at the beginning of the year. More capital and better loan quality is encouraging many lenders to ease credit standards and in turn boosting loan growth. ECONOMIC, COMPETITIVE AND REGULATORY ENVIRONMENT The economic environment improved as the recovery accelerated in the first six months of 2. This helped boost credit union loan growth, slowed credit union savings growth, and improved loan credit quality significantly. Monthly job creation averaged 231, in the first half of 2, up from 2, in the first half of 2 and 187, in the first half of 2. Job creation over 15, per month (the long-run growth rate of the labor force) is viewed by economists as necessary to lower the unemployment rate. During the first six months of the year the unemployment rate fell from 6.7% to 6.1%. The competitive environment intensified as banks eased standards on consumer credit card and auto loans, according to the Federal Reserve s April Senior Loan Officer Opinion survey. Banks reported stronger demand for credit cards and auto loans but weaker demand for residential real estate loans. Banks also noted three factors weighing on credit card growth: the 29 Credit Card Accountability Responsibility and Disclosure Act (Credit Card Act), consumers preference for lower debt levels, and consumers use of debit cards and other payment mechanisms. Total Lending Credit union loan balances rose a strong 1.2% in May 2, almost twice as fast as the.65% average pace set in May 2 and May 2. New auto loans led the pack with loan balances increasing 2.6% in May, versus.5% in May 2. On a year-ago basis, new auto loans are up a remarkable 17.3%, the fastest pace since Total loan balances are up 3.3% year-to-date, versus 1.5% set during the first 5 months of 2, see Figure 1. So what s driving the surge in credit union lending? Five factors stand out: rising consumer confidence, rising household expectations for income growth, an improving labor market, improved consumer balance sheets, and credit unions gaining a larger piece of the consumer credit pie. The credit union share of the total U.S. consumer credit market rose in the last year, from 8.% in May 2 to 8.9% today Figure 1 Total CU Loans Year-to-Date Growth Comparison May 2 3.3% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec %.8%

2 Credit Union Consumer Installment Credit (CUCIC) Credit unions consumer installment credit growth rate accelerated in May to 1.9%, up from the.3% pace set in May 2. With the average age of consumer durable goods at its highest since 1962, many credit union members decided to satisfy some of their pent up demand for cars and appliances. This fast pace is not just a one month phenomenon. Year-to-date consumer installment credit growth is more than twice as fast as compared to the first five months of 2, 5.2% versus 2.2%. On a year-over-year basis, CUCIC growth moved up to a remarkable.2%, as shown by the blue line in Figure 2. Credit union members are feeling more confident to take on additional auto and credit card debt because of the improving labor market, record stock prices, and rising home prices. The Conference Board s index of consumer confidence averaged 81.1 in the first five months of this year, compared to only 66.3 for the similar time period in 2. Credit union credit card loan balances are expected to grow 7% in 2 even though some consumers are still leery of debt after the Great Recession and others are hesitant to take on higher-interest rate debt. Better pricing, easier access to credit and lower fees have boosted credit unions market share of the consumer installment credit market. Growth in Consumer Installment Credit 16 May 2 CUs.2% 8 - Total Market Excl. CUs 6.2% Total Market Excl. CUs & GSLs 2.8% -8 1 Vehicle Loans Figure 2 Vehicle lending continues to surprise on the upside with year-over-year growth coming in at.3%, as shown in the left graphic of Figure 3. In May, credit union auto loan balances rose 1.9% as 16.8 million vehicles (cars and light trucks) were sold in the U.S. at a seasonally adjusted annual rate. June vehicle sales came in at 17 million so we expect credit union lending to remain strong in June. So what s driving the surge in auto loans? Credit unions are offering very competitive loan pricing; five-year new auto interest rates averaged 2.61%, 2 basis points below the bank average. Moreover, longer-term loans are increasing the affordability of new cars. We expect 16.5 million cars sold this year, up from 15.5 million in 2. Vehicle Lending Growth Comparisons 19 Annual Growth May 2 2 CU New vs. Used Vehicle New 17.3%.3% Used.7% Figure 3 2 Credit Union Trends Report

3 Real Estate-Secured Lending 1 st Mortgages and Other Real Estate Credit union real estate lending was firing on three of four cylinders during the first five months of 2, as measured by CUNA s monthly estimates survey, see Figure. First mortgage loan balances rose 2.5% from December through May; adjustable-rate mortgages up 8.7% and fixed-rate mortgages up.1%. Mortgage loans are expected to grow 9.% in 2. NCUA call report data show credit unions originated $17 billion in first mortgage loans in the first quarter of 2, down from $31 billion in the first quarter of 2. But those credit unions sold off to the secondary market only 32% of all new mortgage originations, down from 58% in the first quarter of 2. So the dollar increase in loans held in portfolio was roughly the same in the two time periods. But because of fewer originations, many credit unions are reporting lower gains on sale of mortgage income and mortgage origination fees. This has lowered non-interest income and put downward pressure on credit unions bottom line. For the first time in three years, credit unions are reporting rising home equity loan balances due to rising home prices, lower interest rates, higher consumer confidence, consumers releasing pent up demand for durable goods, and the end of the refinance boom reducing the number of HELOCs rolled into first mortgages. Home equity balances rose 1.3% in May, 2.6% year-to-date and 3% yearover-year. Home equity loan balances are expected to rise 5% in 2. The real estate cylinder that is not yet firing are second mortgage loan balances, which fell.% year-to-date and 5.6% year-over-year as households rolled their second mortgages into their refinanced first mortgage. 15 Growth CU Real Estate Loans 2 = May All Real Estate Loans Fixed Rate 1 st Mortgages Adjustable Rate 1 st Mortgages Home Equity Loans Second Mortgages Figure Surplus Funds (Cash + Investments) Surplus funds rose $.9 billion, or 1.2%, in May to reach $3.7 billion, as the dollar increase in savings, capital and borrowings exceeded the almost $8 billion increase in loans. But compared to one year ago, surplus funds are down $ billion, 2.7%, as the dollar amount of additional loans ($57 billion) exceeded the dollar amount of additional deposits ($3), additional capital ($8.1) and additional borrowing ($7.2). Surplus funds as a percent of assets came in at 35.7% in May 2, down from 38.% in May 2. This shift in the mix of credit union assets is pushing up credit union asset yields. And with credit union cost of funds either flat or falling, net interest margins are starting to expand again for many credit unions. Credit unions continue to lengthen the maturity of their investment portfolios during this low market interest rate environment in an attempt to reach for higher longer-term yields. In May, credit unions reported that 56.1% of all surplus funds had a maturity greater than one year, this is up from 5.8% one year earlier, and 38.5% reported back in May 27. Savings and Assets Credit union savings balances rose 1% in May, a strong number due to five payroll Fridays during the month. The increase in May pushed year-to-date savings growth up to.1%, and 3.7% year over year, see Figure 5. However, we expect credit union savings balances to increase only 3.5% in 2, the lowest since 25, as credit union members loosen their purse strings and increase their purchases of durable goods (items that last 3 years or longer like cars, appliances and furniture). With low short-term market interest rates keeping credit union deposit interest rates at record lows, credit union members prefer to park their savings in liquid, short-term core deposits (share drafts and regular shares) in lieu of term deposits. Over the last months, share draft and regular share balances rose 8.6% and 7.6%, respectively, while longer-term share certificates and IRA balances fell -3.3% and -.8%, respectively. 3 Credit Union Trends Report

4 This shift in the funding base along with record low interest rates has reduced credit union cost of funds to.58% of assets, the lowest in credit union history. We don t expect credit union cost of funds to increase until 215 when the Federal Reserve is expected to raise the fed funds interest rate. The two other sources of funds that credit unions use to fund loans and investments are borrowings and capital, which rose 1.% and 1.5%, respectively, in May. Over the last year, borrowings rose 27.2% and capital increased 7.3%. Credit unions are increasing their long-term borrowings to offset some of the interest rate risk they are taking by holding more long-term mortgage-related assets. Growth In Credit Union Savings 1 May Year Average Growth Rate 3.7% 5.5% 1 Figure 5 As of May, the sources side of the credit union system s balance sheet was composed of 85.5% savings deposits, 3% borrowings and 1.5% capital. With all three components posting greater than 1% growth in May, total credit union assets increased 1.1%. Credit union total assets now exceed $1. trillion, a.6% increase over May 2. Capital and Other Key Measures Over the last year, credit union capital grew 7.3%, see Figure 6, the fastest pace since April of 2. This acceleration in capital growth, or return on equity, means credit union assets can also increase at a faster pace while maintaining a constant capital-to-asset ratio. However, the credit union system reported a capital-to-asset ratio of 1.5% in May, up.3 percentage points from a year earlier, as capital growth outpaced asset growth of.6%. Credit Union Capital Growth and Key Ratios May 2 Capital Growth 7.3% Key Ratios L/S = 7.5% C/A = 1.5% Capital-to-Asset (Right Scale) Loan-to-Share (Left Scale) Figure 6 Credit Union Trends Report

5 Credit union loan quality indicators are now back to pre-recession levels. The loan delinquency rate (loans two or more months delinquent as a percent of total loans outstanding) fell to.81% in May 2, down from 1.% in May 2. This relatively large percentage decline was caused by both the numerator and the denominator numbers moving in the right direction; the dollar amount of delinquent loans fell % over the past year as the labor market improved, and the dollar amount of total loans rose 9.2% due to rising credit demand. Credit union delinquency rates typically reach their nadir in the 2 nd quarter of a year, so we don t expect the ratio to decline much further in 2. Credit Unions and Members As of May 2, CUNA estimates that 6,66 credit unions were in operation, down 327 from May 2. Year-to-date, the number of credit unions fell by 5, see Figure 7, which is significantly faster than the 9 year-to-date average consolidation pace reported over the last years, and 83 in 2. The pace of consolidation in the credit union system is accelerating due to the following factors: retiring baby-boomer CEOs, rising regulatory/compliance burden, record low net interest margins, rising concerns over scale and operating efficiency, rising competitive pressures and members demand for ever more products, services and access channels. Over the last few years, the average size of a credit union that merged fell from $27 million in 28 to $18 million in 2. The decline in the average asset size was due to an enhanced focus by regulators on small credit unions with falling, capital, earnings, assets, loans and members. Therefore, most of the recent mergers were either an acquisition merger (where the assets of the merged credit union were 1-5% of the acquirer credit union) or an absorption merger (where the assets of the merged credit union were less than 1% of the acquirer credit union). Our 2 Forecast estimates an average annual decline of 316 credit unions each year through 218, bringing the total number of credit unions down to 5,215, by the end of 218. Figure 6 6 Annual Net Decline in Number of CUs Number of CUs May 2 May 2 Decline = YTD May Figure 7 Credit unions were attracting members at a record pace during the first five months of 2, averaging over 3, new memberships per month. The membership increase in the first five months of 2 is 25% faster than the similar time period one year earlier. And if this pace continues throughout 2 memberships could increase by 3.6 million, up from the strong 2. million new memberships reported in 2. In percentage terms, credit union memberships rose.3% in May, 1.5% year-to-date, and 2.8% year-over-year. There are several factors leading to this membership surge: aggressive credit union auto pricing relative to banks, an increase in credit demand by the general public, lingering effects of Bank Transfer Day, and relatively tight bank loan underwriting standards. Credit union total memberships reached 99.9 million in May 2, with the expectation of crossing the 1-million milestone sometime in June or July. This means credit union memberships will equal 31% of the total U.S. population. And with the population growing less than 1%, the credit union membership-to-population ratio will continue to rise for the foreseeable future. 5 Credit Union Trends Report

6 National Monthly Credit Union Aggregates CAPITAL/ ($ Billions) (Millions) CREDIT LOAN / ASSET YR/MO LOANS ASSETS SAVINGS CAPITAL MEMBERS UNIONS SAVINGS RATIO , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Credit Union Growth Rates Change Previous Year # OF CUs Delinquency YR/MO LOANS ASSETS SAVINGS CAPITAL MEMBERS # OF CUs DECLINE Ratio* (3.6) (267) 1.287% (3.6) (266) 1.198% (3.9) (289) 1.175% (3.9) (287) 1.18% (3.9) (293) 1.172% (.) (298) 1.9% (3.7) (275) 1.3% (3.8) (281) 1.153% (3.8) (282) 1.7% (3.6) (26) 1.81% (3.7) (27) 1.% (3.6) (261) 1.1% (3.5) (252) 1.2% (.) (289) 1.33% (.) (289) 1.2% (3.9) (282) 1.18% (3.9) (28) 1.% (.) (281) 1.9% (.) (288) 1.28% (3.9) (275) 1.5% (.2) (298).958% (.3) (31).886% (3.9) (273).89% (.) (38).818% (.7) (327).87% * Loans two or more months delinquent as a percent of total loans. 6 Credit Union Trends Report

7 Distribution of Credit Union Loans Estimated $ (Billions) Outstanding 1 ST TOT. OTHR TOTAL TOTAL NEW USED TOTAL UNSEC CREDIT MORT MORT REAL YR/MO LOANS VEHICLE LOANS Ex. CC S CARDS CUCIC TOTAL 2 ND +HE ESTATE MBLs* * Member Business Loans Distribution of Credit Union Loans Change From Prior Year 1 ST TOT. OTHR TOTAL TOTAL NEW USED TOTAL UNSEC CREDIT MORT MORT REAL YR/MO LOANS VEHICLE LOANS Ex. CC S CARDS CUCIC TOTAL 2 ND +HE ESTATE MBLs* (.8) (8.2) (8.2) (7.7) (8.) (8.3) (7.9) (7.) (8.1) (7.7) (7.) 1.8 (3.) (7.5) (7.2) (7.2) (7.1) (7.) (6.8) (6.1). (.8) (6.1) (6.5) (.1) (3.6) (3.5) (3.1) (2.3) (.8) Credit Union Trends Report

8 Annual Growth Rates Total Loans & Installment Credit 15 Total Loans CUCIC CIC Share of Total Loans at Credit Unions $ Billions 3 Consumer Installment Credit at Credit Unions This report on key CU indicators is based on data from CUNA E&S s Monthly Credit Union Estimates, the Federal Reserve Board, and CUNA Mutual Group Economics. To access this report on the Internet: Sign in at cunamutual.com Go to the Resource Library tab Under Publications heading, select Credit Union Trends Report If you have any questions, comments, or need additional information, please call. Thank you. Steven Rick , Ext steve.rick@cunamutual.com CUNA Mutual Group Economics CUNA Mutual Group, 2 All Rights Reserved. CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company, a mutual insurance holding company, its subsidiaries and affiliates. 8 Credit Union Trends Report