Lending Perspectives: How sharp is your pricing pencil?

To best set loan rates, use an analytical approach

Last month, I shared some ideas on how to increase loan growth. Sharpening your pricing pencil was one I mentioned, but to price correctly, you must be committed to an analytical approach.

The COVID-19 pandemic has created three significant challenges for credit unions via their income statement and balance sheet. First, virtually all credit unions have experienced a flood of deposits, lowering loan-to-share ratios. For example, Ent Credit Union is $500 million over budget on member deposits for the year through April 30!

As an amateur economist, I tend to look at financial impacts “on the margin.” As an $8 billion credit union, we have a $7.5 billion balance sheet that’s doing well and generates sufficient earnings. We also have a $500 million chunk of the balance sheet that is basically deposits and investments. Investments, frankly, don’t pay enough to keep the lights on right now. Whether your credit union is $8 billion, $800 million or $80 million, you’re likely to have the same issues.

Secondly, larger credit union mortgage portfolios have re-priced dramatically, thanks to the 10-year Treasury bond yield that plummeted before the country went into the initial lockdown. The yield on our mortgage portfolio has declined over 60 basis points since March of 2020. Mortgages represent about 35% of our assets, so that 70 basis point decline represents about 22 basis points of lost ROA (35% of 60 basis points). That lost earnings power isn’t likely to come back any time soon, creating additional pressure to make money in other lending areas.

 

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