With less than stellar gains in lending, credit unions may haveto shift their focus even more to meeting members where they are asunemployment, furloughs and foreclosures impact how and if they areable to continue paying their loans.

CUNA Mutual Chief Economist Dave Colby said over the next 12 to18 months, repairing members' balance sheets may be the primarysource of loan growth for credit unions. Moves such as loanrefinances and debt captures may aid in providing better financingterms for members while improving credit union spread and creatingroom for loan portfolio growth.

“Since financed consumer spending has stalled, we must turn ourattention to what consumers are doing,” Colby said. “Without loangrowth, we will be forced to turn away deposits and [manage] onrazor-thin margins.”

According to CUNA Mutual Group's August “Credit Union TrendsReport,” which tracked data through June, total loans were down0.9% year to date and 0.7% over the past year. The good news was a0.4% gain in the second quarter, but this positive momentum willnot carry through to the end of year. Colby said the culpritsbehind the stall may be mortgages that will be sold, not held,further weakness in the new-vehicle sales sector and a drop inconsumer confidence, which might imply a deferred release ofpent-up demand. Other factors include a lack of a rapid uptick inconsumer spending and financing of big ticket items.

Beyond the NCUA Call Report data, Colby said in his travelsacross the country, he is hearing discussions from credit unionsthat are creating their own loan demand and searching out membersto help find cash flow through their cooperatives.

“Credit unions took a proactive approach,” Colby noticed.“Everyone is concerned about jobs, rewriting loans and getting cashflow. If staff isn't writing a lot of loans, they have to go outand find them.”

As a further outcome of sluggish lending, Colby said “looking atcost of funds versus marginal investment return, if you had to putit overnight in a corporate, you're losing money.” Based onfirst-quarter data, the yield on average loans was 6.13% or 480basis points above cost of funds, he explained. With the averageyield on investments down to 2.08%, that is just a 75 basis pointpick-up over cost of funds.

“Further, if you look at it on a marginal basis, the 1.33% costof funds is likely higher than short-term investments, thus, it isfinancially better to turn away the marginal deposit in theshort-run,” Colby reasoned.

If a CU only earns a 75 basis point gross spread on a newdeposit and then has to net out NCUA insurance or assessment costsand account servicing, the result is “razor-thin margins at best,if not upside down,” Colby said. An average dollar loaned out added405 basis points more than an average investment.

Even as CU economists “are desperately searching for some goodnews in lending,” there are some bright spots. Member businessloans, used vehicles, first mortgage and home equity loans hadposted positive year-to-date results. Colby said these gains weremore than offset by declines in new vehicles and second mortgages.That 0.4% advance in lending in the second quarter came from someof the post holiday payoff surge, spring and summer buying and taxincentive mortgages in the pipeline with historic low rates yet tobe sold, he added. Still, caution remains the message within theindustry.

“After expanding just 1.2% in 2009, I believe credit unions willhave a difficult time achieving 1.7% loan growth in 2010,” Colbysaid. “Current lending strategies are not in sync with memberfinancing needs or delivery channel preferences.”

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