Credit Union CEOs Express Pessimism Concerning Economic Expectations

DALLAS - In contrast to the optimism felt after the first quarter of 2006, credit union leaders have reversed direction and are feeling less confident about economic conditions. Results of Southwest Corporate's quarterly CU CEO Confidence Survey show a slight drop in economic expectations for their own credit unions' financial condition but a "significant" downturn in expectations for their members' financial condition. The CU CEO Confidence Index dropped to 37.22 in the July 2006 report down from 42.46 as measured in April, but still higher than the 33.44 level reported in January. The confidence index is a compilation of responses measuring credit union CEOs' feelings on six key issues: members' current financial condition, CU's current financial condition, members' financial condition six months from now, CU's financial condition six months from now, loan demand at the CU in six months, and share deposit growth at the CU in six months. Measurements trended downward across the board. CEOs' perspective of their CU's current financial condition fell from 57.32 in April to 55.06 with this survey. On the other hand, their view of members' current financial condition fell from 39.49 the first quarter of 2006 to 31.74 in the latest survey. CEO expectation for members' financial condition six months from now also fell from 40.76 last survey to 30.06 in July. Share deposit growth expectations also dropped substantially from 28.34 in April to 15.45 this survey. The only upturn in survey measurements was seen in expected loan demand over the next six months, which rose to 33.99 from 29.30 in the previous survey. "Apparently, the CEOs' financial outlook for their institutions is greater than what they perceive for their own membership," said Brian Turner, manager of advisory services for Southwest Corporate's Investment Service division. "This appears to counter the perspective of the nation's consumers as a whole. In May, the Conference Board's index increased to 105.7 from 104.7 and reflected consumers' optimism about a strong job market, rising incomes and lower inflationary pressures. What did correlate was the consumers' assessment of their own present circumstances, which both indices reported as declines." Even though the market has been missing the lucrative auto incentive programs from last year, and the average rate for 30-year mortgages has increased from 6.25% to 6.77%, CEOs appear to have a positive outlook on loan growth, which is currently running at a 4.9% annual rate through April versus 10.6% last year, Turner said. This is offset by an existing "pessimistic outlook" for share growth, which is currently positive 7.9% through April versus 3.8% in 2005. Turner pointed out if this is the case, CEOs would also be concerned over their liquidity profile later this year. In 2005, credit unions experienced negative net operating cash flow of approximately $23.9 billion. Through April 2006, the industry generated positive net operating cash flow of approximately $8.0 billion. Floyd Atha, CEO of $55 million Oklahoma Educators Credit Union, said competition from other financial institutions has caused their spreads to shrink dramatically. "Our indirect lending is fine, but we're struggling to get direct loans," Atha said. "We could make more by putting the money in CDs." Atha said he doesn't "sense a lot of confidence in members, who are mostly school employees." "They're not spending; they're leaving money in their accounts this summer," Atha explained. "Overall, I think the economy is spinning its wheels. Gas prices are going up. Utility prices are going up. Everything except salaries are going up. Some members aren't borrowing money, because they know they can't pay it back." Turner noted that CEOs are also concerned about the adverse impact that rising short-term rates will again put on cost of funds. "Although marginal asset yields are higher than last year, many CEOs are monitoring their net interest margins very closely. The slight drop in their own financial outlook over the next six months reflects this concern," Turner said. The number of survey respondents was 180, the highest ever since Southwest Corporate began the CU CEO Confidence Survey in January 2004, according to the corporate. Sent to 578 credit union CEOs in June, the survey had a 31% response rate. -msamaad@cutimes.com