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CU CEOs stumped for predicting economys direction
PLANO, Texas (7/22/10)--Credit union CEOs are at a standstill when it comes to registering their confidence in a national economic recovery, according to a study by Southwest Corporate FCU in Plano, Texas. Southwest Corporate’s second quarter 2010 CEO Confidence Index was nearly identical to first quarter results, indicating that credit unions may be hearing that the economy is improving, but not yet feeling it, the corporate said. The index registered 20.73, down 0.22 points from last quarter, but down 3.81 points from first-quarter 2009. Marks have ranged from a high of 47.4 during second quarter in 2004 to a low of 7.9 during first quarter of last year 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 asset NAS JRB CU in New Orleans, told the corporate. “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,” she added. 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 seven 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% for the year- following a modest 1.2% 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, Turner said. The lack of overall loan demand could result in positive operating cash flows for the remainder of the year, he added. 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,” Turner said. “This burst would not be enough, however, to create sustainable growth. 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,” he added. “This behavioral change could alter balance sheet allocation over the next few years.” Credit unions have felt some of the impact already. During the past decade, credit union vehicle loan allocation fell from 40% to 29% of loans outstanding, while first-lien mortgages increased from 25% to 39% of total loans. At the same time, gross margins tightened by about 60 basis points, and core profitability decreased more than 40%. 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.”
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