July 16, 2010  

                                                               

 

Credit Unions ‘Holding their Breath’

that Economy will Improve

Confidence Index Remains Unmoved

 

 

Plano, TX - Credit union CEOs are at a standstill when it comes to registering confidence in a national economic recovery. Southwest Corporate Federal Credit Union’s second quarter 2010 CEO Confidence Index was virtually identical to first quarter results, indicating that credit unions may be hearing that the economy is improving, but not yet feeling it.

 

The index registered 20.73, down just .22 points from last quarter. Marks have ranged from a high of 47.4 (Q204) to a low of 7.9 (Q109) over the 6-1/2 years covered by the survey.

 

“Most credit unions don’t know what to expect from the economy,” said Helen Delin, CEO at $36 million NAS JRB Credit Union in New Orleans, Louisiana. “This is one year we can’t predict. Low interest rates, the corporate stabilization program, and new regulations coming out all will affect overall earnings.”

 

“Credit unions were told that 2010 would be the most difficult year, so we’re just holding our breath, hoping to get through 2010 and see conditions improve.”

 

The quarterly Confidence Index measures economic expectations in six areas on a five-point scale, from negative to positive. Three of the six gauges in the most recent survey – those measuring expectations six months from now for member financial condition, credit union financial condition and loan demand – also held steady, varying less than one point from last quarter.

 

The largest movement was seen in CEOs’ expectations for share deposit growth, which fell more than 7 points over last quarter. Two other gauges – those measuring the current financial conditions of members and credit unions – increased slightly by 1.48 points and 3.34 points, respectively.

 

 “The consumer continues to be wary of the weak employment climate and lost household wealth, to the point that many are deferring large ticket purchases, such as homes, cars and appliances,” said Brian Turner, director of Southwest Corporate Investment Services’ advisory service. “Unfortunately, credit unions are in the business of extending credit. So there’s little surprise that loans outstanding are down about 2 percent for the year – following a modest 1.2 percent increase in 2009.”

 

Historically, credit unions generate most of their operating cash flow during the first quarter and loan two-thirds of that cash flow during the next three quarters, according to Turner. The lack of overall loan demand could result in positive operating cash flows for the remainder of the year, he said. This would put greater pressure on investment portfolio income to recover the credit union’s revenue stream and make it necessary to manage cost of funds more tightly to retain net interest margins.

 

“Still, pent up loan demand could spark a short-term burst of activity later this fall – particularly in vehicle lending. This burst would not be enough, however, to create sustainable growth,” Turner said. “The depth of the recession has had a greater impact on members than most realize, which may require credit unions to rethink their business models – perhaps over the next decade.”

 

Turner said consumers have continued to reduce their overall debt burdens, which had reached historical highs. “Consumers learned a lesson the hard way and will be less prone to take on that level of debt again, at least for the immediate future. This behavioral change could alter balance sheet allocation over the next few years.” 

 

Credit unions have felt some of the impact already. Over the past decade, credit union vehicle loan allocation fell from 40 percent to 29 percent of loans outstanding, while first-lien mortgages increased from 25 percent to 39 percent of total loans. At the same time, gross margins tightened by about 60 basis points, and core profitability decreased more than 40 percent. Modest growth in consumer loans going forward would keep mortgage allocation higher and potentially alter the credit union earnings and risk profiles for some time, Turner said.

 

“By no means do these figures portend that major difficulties lie ahead,” said Turner, who characterized his outlook as “cautiously optimistic.” “Instead, they emphasize that credit unions must position themselves for potentially dynamic changes in the future.”

 

Additional survey details, including historical data, are available in the Members Only section at www.swcorp.org. For the latest outlook on the economy by a host of top-notch financial forecasters, plan to attend Southwest Corporate’s 33^rd annual Economic Forum in Frisco, Texas on October 26-27.