Offsets May Overshadow Growth
When it comes to loan originations, it appears credit unions are seeing a glimmer of hope in their portfolios.
Callahan & Associates recently reported that the country’s nearly 7,400 credit unions increased lending by 8% in the first half of 2011. The firm said mid-year marked the fourth consecutive quarterly rise in total loan originations. Comparing the first six months of 2011 to the same period in 2010, Callahan said consumer loan originations increased by 10%. First-mortgage volume grew 7.3% during the same time.
Of all the mid-year data now out, Callahan counts “credit unions’ growing loan momentum [as] the most important trend reported by the $955 billion credit union system.”
After taking a look at the data, Brian Turner said he is “cautiously optimistic.” Turner, director of advisory services at Southwest Corporate Investment Services, a wholly owned CUSO of Southwest Bridge Corporate FCU, acknowledged that through the first half of the year, loan demand has technically improved.
However, Turner said after declining by 1.2% in 2010, loans have still contracted through the first half of 2011 at an annualized pace of 0.8%. “So again, technically, loan growth rates have been improving over the past few quarters, but the industry is still not originating enough loans to offset the amount rolling off the books through scheduled payments, maturity or refinancing.”
Callahan reported the four consecutive quarters of increased loan originations has helped to grow total revenue. Both the delinquency and net charge-offs ratios have improved and the coverage ratio, which is loan-loss allowance divided by total reportable delinquent loans, exceeded 100% for only the second time since mid-year 2007, according to Callahan President/CEO Chip Filson.
Originations are certainly up, but the increases are miniscule, said Dave Colby, chief economist at CUNA Mutual Group.
“I love to see credit unions originating a lot of loans primarily to members who can afford them,” Colby said. Colby said he encourages credit unions to find members with a lot of equity in their homes and pitch the idea of a five-year or seven-year loan.
“I know a 15-year loan at 3.5% sounds terrible, but if your alternative is short-term investments that are paying next to nothing.”
Meanwhile, Turner said despite seeing marginal spreads eroding this year, earnings have improved over the past two quarters, increasing from about 0.50% in 2010 to an estimate of 0.75% in 2011. Still, eroding marginal spreads have been offset by declining delinquencies and net charge-offs during the first half of the year accounting for about 25 basis points of the earnings improvement, he added, saying slightly lower net operating expense accounts for the rest.
Filson said even though first-mortgage volume has grown, credit unions continue to sell 45% of their production volume to the secondary market. When the Federal Reserve recently said it would keep rates low for two years, it opened the door for credit unions to provide “a unique opportunity to expand balance sheet loans and increase margins due to the stable funding outlook for short-term deposits,” according to Filson.
Colby added that the Fed’s prolonged period of low rates might help remove interest rate risk.
“Lending opportunities may go away because of yield frustration,” he said. “Credit unions are also going to be competing for subsidized financing with auto dealers.”
Low rates may not be enough to motivate consumer spending, Turner warned.
“The low-rate environment brings little incentive because the consumer is facing a pure economic calamity,” Turner said. “Job insecurity fueled by an unemployment rate wavering around 9.2%, falling home values and now a volatile stock market continue to adversely impact consumer spending behavior.”
Increasing loan volume is also increasing credit union market share, Callahan reported. The industry’s share of the auto finance market is 16.2% at mid-year making it the highest level of the past 12 months. The 5.7% of total year-to-date mortgage originations is double the pre-crisis level and continues to increase, according to the firm’s data.
Turner said credit union vehicle lending is probably the least encouraging. After declining a minus 5.5% in 2010, vehicle loans outstanding were down minus 0.8% in 2011. New auto loans at a negative 9.8% pace were offset by a 4.8% increase in used auto loans, he pointed out. Vehicle loan allocation, once the bread-and-butter of credit unions accounting for 40% of loans in 2000, now account for less than 29% with used auto loans amassing 63% of the total, Turner said.
“Even if you’re making and selling a lot of loans, hopefully, you’re making a positive spread on originating loans,” Colby said. “Fees cover more than the cost to originate, and the member benefits. That’s a good thing.”