The Terrible Loan/Share Limbo. How Low Can Your Rates Go?

by: Gregg Stockdale, President/CEO, 1st Valley Credit Union

The real question is how low SHOULD you go? If your credit union still is predominately consumer lending oriented, then you are all too aware of the great de-leveraging our nation is going through.  Perils abound on all sides.  Cities have filed Bankruptcy, States are in trouble, our Government is running rudderless, and the world teeters on the brink.  All this does NOT make for a strong loan demand.  Additionally the Fed is keeping rates low artificially.

It looks like we have a few more years of this “condition” to live with before any relief is in sight, according to the Fed and the estimates of how much longer we’ll be in an “overleveraged” position.    So, credit unions that used to have 80% L/S Ratios are now seeing 50% (or less).  Welcome to my world.  In the good old days, we struggled to keep above 50%.  Now we are in the 30% range.  And yet, our ROA is ok (not great @ .60%) and we are moving along.   Why?  Well the dilemma some are just now facing has been our “normal” for quite some time.   We have long ago viewed our excess funds as a revenue source and not just extra liquidity to be put aside to handle the daily in and out flows of cash.  Because of our attention to investments, we just finished the first half of the year with a 2.63% return on investments.  So?  How low should we go to pursue new auto loans?

First – Auto loans are not risk-free.  The rate charged has to include an evaluation of loan losses.

Second – Auto loans are not expense-free either.  The rate charged has to include covering the expenses of providing that loan.

We’ve seen credit unions offering rates less than 2% on auto loans. You cannot subtract any positive number from 2 and get to 2.63!  You owe it to your members to reasonably manage the funds that they entrusted you with; either through loans to other members or investments.
During this economy, we have decided to pass up the opportunity to chase the rates below 2% for long-term loans.

I find it amazing that credit unions will not make an investment for longer than 3 years but at the same time, lend at super-low rates with terms of 6 or 7 years in order to “pump up the volume” of loans.

I realize not everyone is in this situation, but I do believe there is a wake-up call being given to our excess funds –  “It’s not just liquidity any more Toto!!”  There is a new economic situation at hand and, it looks to be here for a long time.   I don’t think we are anywhere close to being back to business as normal.  Credit Unions would do well to reconsider their loan pricing in light of the economy as well as looking to increase the yield on their excess funds.  From the numbers I’ve seen, many cu’s would be profitable if they only increased their investment yields by as little as 50 basis points.

It’s high time some credit unions got out their sharpest pencils and looked at the monies they have left on the investment table.  They owe it to their members.

Gregg Stockdale is President/CEO of 1st Valley Credit Union. Today 1st Valley Credit Union has over $35 million in assets and serves over 3,800 members with a full suite of financial products and services at competitive rates and with outstanding customer service. We now serve the entire County of San Bernardino. www.1stvalleycu.com