As Lending Sags, Repair and Recovery
With less than stellar gains in lending, credit unions may have to shift their focus even more to meeting members where they are as unemployment, furloughs and foreclosures impact how and if they are able to continue paying their loans.
CUNA Mutual Chief Economist Dave Colby said over the next 12 to 18 months, repairing members' balance sheets may be the primary source of loan growth for credit unions. Moves such as loan refinances and debt captures may aid in providing better financing terms for members while improving credit union spread and creating room for loan portfolio growth.
"Since financed consumer spending has stalled, we must turn our attention to what consumers are doing," Colby said. "Without loan growth, we will be forced to turn away deposits and [manage] on razor-thin margins."
According to CUNA Mutual Group's August "Credit Union Trends Report," which tracked data through June, total loans were down 0.9% year to date and 0.7% over the past year. The good news was a 0.4% gain in the second quarter, but this positive momentum will not carry through to the end of year. Colby said the culprits behind the stall may be mortgages that will be sold, not held, further weakness in the new-vehicle sales sector and a drop in consumer confidence, which might imply a deferred release of pent-up demand. Other factors include a lack of a rapid uptick in consumer spending and financing of big ticket items.
Beyond the NCUA Call Report data, Colby said in his travels across the country, he is hearing discussions from credit unions that are creating their own loan demand and searching out members to help find cash flow through their cooperatives.
"Credit unions took a proactive approach," Colby noticed. "Everyone is concerned about jobs, rewriting loans and getting cash flow. If staff isn't writing a lot of loans, they have to go out and find them."
As a further outcome of sluggish lending, Colby said "looking at cost of funds versus marginal investment return, if you had to put it overnight in a corporate, you're losing money." Based on first-quarter data, the yield on average loans was 6.13% or 480 basis points above cost of funds, he explained. With the average yield on investments down to 2.08%, that is just a 75 basis point pick-up over cost of funds.
"Further, if you look at it on a marginal basis, the 1.33% cost of funds is likely higher than short-term investments, thus, it is financially better to turn away the marginal deposit in the short-run," Colby reasoned.
If a CU only earns a 75 basis point gross spread on a new deposit and then has to net out NCUA insurance or assessment costs and account servicing, the result is "razor-thin margins at best, if not upside down," Colby said. An average dollar loaned out added 405 basis points more than an average investment.
Even as CU economists "are desperately searching for some good news in lending," there are some bright spots. Member business loans, used vehicles, first mortgage and home equity loans had posted positive year-to-date results. Colby said these gains were more than offset by declines in new vehicles and second mortgages. That 0.4% advance in lending in the second quarter came from some of the post holiday payoff surge, spring and summer buying and tax incentive mortgages in the pipeline with historic low rates yet to be sold, he added. Still, caution remains the message within the industry.
"After expanding just 1.2% in 2009, I believe credit unions will have a difficult time achieving 1.7% loan growth in 2010," Colby said. "Current lending strategies are not in sync with member financing needs or delivery channel preferences."