Slowdown in CU Member Business Lending May Continue for Some Time
Year-to-date, MBL portfolios are up just 1.7%, according to the October issue of CUNA Mutual Group's "Credit Union Trends Report." Revised data indicated that MBL growth slowed to 7% at the end of August. Annual growth was 33.6% in 2005 and while still respectable, continued to drop in 2006 to 23.4% and even further in 2007 to 17.2%. The credit union industry experienced 18% MBL growth in 2008.
"While we believe the demand is there for MBLs given all of the other lenders who have extensively curtailed small business lending or left the market, credit unions are proceeding cautiously with expanding their MBL portfolios given the economic times, collateral valuations and overall business climate," said Dave Colby, chief economist with CUNA Mutual.
Credit unions have the propensity to be discerning in their selection of risks and build generous risk-based pricing premiums in an effort to create a strong portfolio of MBLs, Colby explained. However, "given our consumer credit concerns, corporate credit union capital losses and past, pending and future assessments, our risk tolerance has declined."
Looking at the big picture, total loan growth is less than half of the 2008 pace and roughly a third of its 10-year average annual gain, according to the report's data. Through the first eight months of 2008, loans were up 5.1%; in 2009 year-to-date gain is just 1.7%. In August, $3.8 billion or 38% of the year-to-date increase occurred that month with all loan classes up except second mortgages. The combination of loan payoffs and first-mortgage loan sales are just under new originations, which may mean total loan growth will remain low, the data showed.
"Now more than ever, credit unions need the additional spread income lending provides but can't afford the interest rate risk of historically low yields on fixed-rate first mortgages," Colby pointed out.
Meanwhile, "positive revisions" in vehicle loans were offset by lower estimates for real estate-secured loans, credit cards and unsecured loans. The net effect was no change in loan growth trends, according to the report.
Where MBL activity could end up heading for the remainder of the year may be impacted by the credit union industry's tendency to pull back on expanding their membership and select employee group bases. "Seasonal weakness," as Colby coins it, is expected in the last four months of the year. At the end of August, total membership was an estimated 92.4 million with a year-to-date gain at 1.6 million. Comparing the numbers, the average annual gain from 2004 to 2008 was just under 1.2 million, the data showed.
Colby said marketing and SEG expansion budgets are flush early in the year, giving credit unions the tools to pursue aggressive membership campaigns. By the end of the summer, funds start to deplete and a review of the year-to-date results may depict goals falling under plan, he added.
"Everyone is asked to tighten their belts [and] cut spending. SEG expansion is greatly diminished, and some of the budget is saved, and some used for culling the membership base of low-balance and inactive members," Colby noted.
Members are given the choice of more active participation in their credit unions through larger share balances, the use of more services "or take their $5 back," Colby noticed. "Somehow this or a similar seasonal pattern appears each year."
Add the strong downward pressures on return on assets, credit union expense resources for expanding membership become even more limited at year-end. Looking long term, the credit union industry may average a net increase of less than one million members per year "with more focus placed on the depth of mutually beneficial relationships versus sheer growth in numbers."