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MADISON, Wis. – Forty-six credit unions disappeared in June contributing to the net decline of 175 credit unions for the first half of 2005. More merger approvals could lead to a “slightly faster pace” of consolidation for the rest of the year, according to the latest CUNA Mutual Group Credit Union Trends Report. At the end of June, there were 9,171 credit unions. “We can expect the loss of another 360 CUs in 2006, barring any significant changes in regulatory, compliance or other policies,” said Dave Colby, CUNA Mutual corporate economist. On the up side, early estimates show total credit union membership increased by a “healthy” 1.3 million over the first six months of 2005. If this data is not revised significantly based on final Mid-Year NCUA Call Reports, the YTD increase will exceed the total gain for all of 2004, according to the report. “We are now on track to easily top a net two million member increase in 2005,” Colby said. At 87.4 million, total membership climbed by 287,000 in June and now stands at 1.7 million or 2.0% above the June 2004 level. “Credit unions appear to be more successful at tapping into potential members gained through charter expansions, as well as increasing their count by new members derived through indirect lending programs,” Colby said. “At the current rate of growth, credit unions will easily top our conservative membership growth estimates, but we will wait for final data revisions before modifying our forecast for 2005 and beyond.” “The two major influences not reflected in June’s data (higher long-term interest rates and “buy like an employee” incentives) will likely change the relative sources of loan growth in the second half of the year,” Colby said. Credit unions can expect a moderate jump in new vehicle loan growth over at least the next two months and higher interest rates will translate into slower fixed rate first mortgages’ portfolio gains. Overall, through the first six months of 2005, total CU loans are up $21 billion (4.8%) to $449 billion. While lending is up, net deposit inflows are sluggish, the report showed. At $591 billion, total savings are up just 4.1% over the past year and 2.8% YTD. Regular shares, which account for 37% of all deposits, are still paying less than 1%. This portfolio is basically unchanged over the past year, but has risen a modest 1.7% through the first half of 2005, Colby pointed out. CDs (24% of all deposits) have accounted for 63% of the YTD savings gain and almost 74% over the past year. “Despite healthy advances in total CU membership – although many are gained through indirect lending programs – the nation’s CUs are unable to significantly improve net deposit inflow results,” Colby said. The average rate paid on a one-year CD rose to 3.1% in June, but “odd maturity” CDs paying higher rates are the primary source of net new deposit inflows, according to the report. Historically, July and August are weak months for savings growth due to vacation and back-to-school spending, Colby said, adding a rapid turnaround in the current slow growth trends is unlikely. Still, CUs will adjust deposit yields enough to improve gains by year-end. Although surplus funds were down $5.7 billion (2.6%) in June and are off 4.0% over the past year, at $215 billion the CU system has more than adequate liquidity. This measure can vary significantly by CU, Colby reassured. The distribution of surplus funds has remained relatively constant over the past year. Agency investments represent about 43% of the portfolio and corporate CU investments roughly 16%. Currently, 51% of surplus funds are scheduled to mature in one year or less. “This is a slightly more liquid position than June 2004 due to strong loan growth and slower deposit inflows,” Colby said. The surplus funds-to-asset ratio has fallen to just over 31% and is now three percentage points below the June 2004 level. As for the nation’s economy, nine consecutive quarters of real (inflation adjusted) growth above a 3% annualized rate is a good sign, Colby said. More than 1.3 million jobs were created through July and the unemployment rate is holding at 5.0%. “Looking ahead, we see the housing sector, a significant growth engine over the past few years, losing steam as interest rates climb,” Colby said. “The best news for credit unions is the move to “employee pricing” incentive programs by major automakers and away from subsidized financing promotions. This should boost credit union loan growth in the near-term.” [email protected]

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